I once worked for one of the "Top 10" optical companies in the United States. By today's standards that company would do $65 million to $75 million in dispensary sales annually. While employed there I had the fortune to work alongside a professional merchandise manager, "Dan." His primary responsibility was to put together and manage an array of frames that would generate the greatest amount of sales and profits for the company. He was good at it.
I learned a lot by watching and listening to Dan. I learned that inventory is not just merchandise; it's cash—hard-earned investment dollars. Those investment dollars are hard to come by in a large company, so the decision to invest them in inventory had to be justified constantly.
Every frame that inhabits a frame display is cash that has been invested. That investment pays off when the frame is sold. Until it is sold, the invested cash is virtually in financial limbo. Dan's goals were to invest only as many dollars as necessary and to achieve as high a return on those dollars as possible.
Dan's performance was measured in a number of ways. One way to measure how hard-invested inventory dollars are working is to measure the number of times a year the inventory sells through. This is commonly referred to as "inventory turns." It is defined as the number of times an inventory is sold in a year.
Inventory turns are calculated by dividing the cost of goods sold by the average inventory during the same period.
I like to compute this number every month. I use the month-end inventory value figure, which gives me a reading on that month's performance. I can graph that performance.
An alternative method of measuring inventory turns is to use units instead of dollars. This method is not quite as accurate, but it is faster. It is faster because it is not necessary to compute the value of the inventory to get a reading on how hard the inventory is working.
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