SMRP Best Practice Metrics FOR COMMENT

1.3 Inventory Turns

A. Definition:

Inventory turns identifies how quickly specific types of inventory are flowing through the
inventory system. Normally this is divided into at least two categories: 1) operating supplies
that are supposed to turn frequently, and 2) spare parts which will usually have a lower turn
over.

B. Objectives:

Inventory turns is a measure that can be used to manage a facility’s inventory to insure proper
stock levels. This can be used in conjunction with the metric Stock Outs to verify that the
inventory levels are correct. A zero stock out and low turn ratio would support work to reduce
inventory levels, and to manage risk to an acceptable level, on both operating supplies and
spare parts. The optimum turn ratio will be different for different classes of parts, and will
depend on the amount of risk a facility is willing to take. A high turn ratio on spare parts could
indicate a facility wide reliability issue that needs to be addressed.

C. Formula:

Inventory turns has no units and is calculated as follows:

Inventory Turns = Value of Stock Purchased/Value of Stock on Hand

This can be calculated for any time period but due to the fact that purchasing timing can
have an effect, it is best to use a longer time frame or rolling time frame. A twelve
month rolling period should be considered so that reaction to changes to the inventory
system may be seen quicker than waiting for a whole year between measurements.

D. Component Definitions

Value of Stock on Hand The current dollar value of the stock in

Value of Stock Purchased
Twelve Month Rolling period
inventory. It is usually obtained from the
accounting system.
The dollar value of the item purchased in the
period for which the metric is being calculated.
A 12 month period that starts from the current
month and goes back 12 months. For a metric
that comes out in May 2006 the 12 month period
would be May 2005 through and including April
2006

© 2006 SMRP Page 1 of 3 Rev 4-FC

Prepared by: Kevin Stewart Date: June 1, 2006
SMRP Best Practice Metrics FOR COMMENT

1.3 Inventory Turns

E. Qualification:

1. Time Basis: Monthly

2. Indicator type: Lagging
3. To be used by: Inventory managers

4. Due to the nature of stock replenishment the user of this metric is cautioned to insure that
it is giving an accurate picture. This is usually accomplished by having a long enough
measurement period to insure to smooth out the purchasing cycles.

5. As with all metrics they are better used in groups as they all tend to drive specific
behaviors.

6. Trending this is suggested as a methodology to insure over the long run that Inventory
management processes don’t change slowly without anyone recognizing that the changes
in manpower, stocking levels, parts usage have taken place.

7. Inventory turns should compare apples to apples so like items should be grouped together
to run this metric. At the very least spare parts which are there to repair equipment
should be separated from the Operating supplies such as gloves, and other consumables
that move through the inventory system quickly.

8. Suggested ranges to gauge progress:

Spare parts turns = 1.2 to 2.0
Operating supplies = 5.0 to 7.5

F. Sample Calculation:

The plant manager is reacting to pressure from the corporation to reduce costs. As a cost
cutting measure, he/she requests that the inventory manager reduce the stock on hand across
the board by 10%. The inventory manager retreats to his/her office to calculate some
numbers in order to determine where he stands. He/she gathers the files and captures the
following data:

• Category – spare parts. The total dollar value of items classified as spare parts at the
end of June 2005 = $3,456,789
• Category – spare parts. The total dollar value of items purchased that were classified
as spare parts at the end of June 2005 for the 12 month period from July 2004
through June 2005 = $5,123,456
• Category – operating supplies. The total dollar value of items classified as operating
supplies at the end of June 2005 = $1,567,890
• Category – operating supplies. The total dollar value of items classified as operating
supplies for the same 12 month period = $9,345,678

© 2006 SMRP Page 2 of 3 Rev 4-FC

Prepared by: Kevin Stewart Date: June 1, 2006
SMRP Best Practice Metrics FOR COMMENT

1.3 Inventory Turns

From this, the inventory turns for the past 12 months are calculated as:

Inventory Turns = Value of Stock Purchased/Value of Stock on Hand

• Spare parts Inventory Turns = $5,123,456 / $3,456,789 = 1.48

• Operating Supplies Inventory Turns = $9,345,678 / $1,567,890 = 5.96

Stock outs for either category are running at about 2%, already at the high end of the
acceptable range. With this information the inventory manager returns to the plant
manger and presents his/her case that it may be possible to reduce inventory.
However, it must be done with a scalpel, as the inventory turns and stocks indicate
he/she is right where the inventory levels should be. He/she goes on to inform the
plant manger that further reduction without paying attention to the reliability
consequences would cost more than the reduction in spare parts.

© 2006 SMRP Page 3 of 3 Rev 4-FC

Prepared by: Kevin Stewart Date: June 1, 2006