Issue Date: Parts Manager Apr 1, 2009, Posted On: 4/1/2009
What's the right way to calculate True Turns? The formula for calculating True Inventory Turns is: Gross Turn Ratio x Purchase Efficiency = True Turns
The Gross Turn Ratio is the annualized cost-of-sales divided by the average inventory from the general ledger. In my opinion, this is the 'weak sister' of calculations but it is where we all start.
Purchase Efficiency is the total of the following three types of purchases (annualized):
1. All parts purchased on a regular (weekly or daily) stock order, including special orders that are added to the regular stock order for convenience and efficiency. It also includes any and all annualized solicited orders bought FOR STOCK.
2. All parts purchased from outside vendors FOR STOCK. Not those we chase after or wait to be delivered on demand. These are parts like jobber purchases for stock purchased to put on the shelf based on past demand and purchased in anticipation of future demand. The factory might not like this, but that's tough. The parts manager may find a better, more reliable, equal quality and cheaper source than the OEM and buys from them FOR STOCK.
3. All foreign parts purchases. These are parts purchased to fix cars and trucks in factory brands that we do not represent. We have no purchase option such as a stock order, and purchase them only when needed from the best source in town. The purchase of these parts affects the cost of sales but we would not, under normal conditions, stock these parts. The body shops are a large source of these parts. The parts manager found a good source, once, bought the part, used the part, but will never stock the part. No DMS system does a good job of tracking these.
The total of the above three types of efficient purchases, annualized and divided by the annualized cost of sales yields the Purchase Efficiency.
Purchase Efficiency of 85% - 95% is an excellent figure. This percentage times the Gross Turn Ratio yields the True Turns:
Gross Turn Ratio - 6.5 Purchase Efficiency - 84%
6.5 X .84 = 5.5 True Turns
Don't get hung up on a single month. Focus on the trend.
Mike Nicholes is president and founder of Nicholes Capital Management, a fixed operations consulting firm. Visit www.partsconsulting.com for more information.
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