Frequently Asked Questions

Inventory Turnover is not a pastry, nor a term used by someone who is really high-tech. Rather, it is something we who are in the business of logistics should really understand, although I must admit, it took me a little while to comprehend. The explanation I am going to use is not the same for inventory turns used in a financial environment which uses a method is to divide the Annual Cost of Sales by the Average Inventory Level.

Example: Cost of Sales = $36,000,000. Average Inventory = $6,000,000. $36,000,000 / $6,000,000 = 6 Inventory Turns

What I am trying to explain here, is the calculation of inventory turns quantified in quantity form, i.e. actual units of inventory.

To calculate physical inventory turns we must understand and use three basic concepts:
• Average Inventory = Average Inventory equals beginning inventory or ending inventory divided by 2.
• Throughput = Throughput equals receipts plus shipments divided by 2.
• Turnover = Throughput divided by average inventory.

So lets use an example: Suppose you have 1,000 units of widgets on the first day of the month, and you have 1,000 units of widgets on the last day of the month, so now use the Average Inventory Formula (Average Inventory = Average Inventory equals beginning inventory or ending inventory divided by 2):
1,000 plus 1,000 divided by 2 equals 1,000 units of Average Inventory.
Now suppose you receive 2,000 units per month, and then ship 2,000 units per month, so we now use the Throughput Formula (Throughput = Throughput equals receipts plus shipments divided by 2.):
2,000 plus 2,000 divided by 2 equals 2,000 units of Throughput.
So we now use the Turnover formula (Turnover = Throughput divided by Average Inventory):
2,000 units of Throughput divided by 1,000 units of Average Inventory equals 1 Turnover per month, or if you want annual turns, simply multiply monthly by 12 (months per year) which results in 12 Turnovers per year.

Understanding Inventory Turns can help you understand your velocity of sales, and help optimize your supply chain. The systems used at Prime Logistics automatically calculate your inventory turns for each of your SKU’s or the total of all your SKU’s.

Prime Logistics, Inc. covers inventory under our warehouse legal liability insurance. To better understand this please see Insurance - What Your Customer Needs To Know, written by Ann Christopher for the International Warehouse Logistics Association. This article explains warehouse legal liabilities and the Uniform Commercial Code that applies to all warehouse providers.

Read this article...find out what customers need to know about insurance CLICK HERE

A method of public warehouse billing for storage, in which the customer is billed a one-month storage charge for all product as it is received. The same unit, if still in storage, is billed an additional monthly charge on each monthly anniversary date thereafter. This method does not involve any pro-rating of time in storage and so it is complicated in that each anniversary date for all items in storage must be separately identified. Prime Logistics has the systems and technology to provide detailed, accurate, anniversary billing.

A method of public warehouse billing for storage in which the customer is billed for all inventory in the warehouse at the beginning of the month as well as for each unit received during the month. Merchandise received during the first half of the month is billed at a full-month storage rate, while merchandise received after the 15th day of the month is billed at a half-month storage rate.

 lo·gis·tics – Pronunciation: lo-’jis-tiks

Function: noun plural but singular or plural in construction

Etymology: French logistique art of calculating, logistics, from Greek logistikE art of calculating, from feminine of logistikos of calculation, from logizein to calculate, from logos reason

Date: circa 1861
1: the aspect of military science dealing with the procurement, maintenance, and transportation of military matériel, facilities, and personnel

2: the management of the details of an operation

3: all activities involved in the management of product movement, that is, delivering the right product to the right place at the right time for the right price.

In October 1985, the Council of Logistics Management (CLM) adopted the following definition:
“Logistics management is the process of planning, implementing & controlling the efficient, cost effective flow & storage of raw materials, in-process inventory, finished goods, & the related information from point of origin to point of consumption for the purpose of conforming to customer requirements.”

In September 1986, the Logistics Management Association of Australia (LMA) also adopted the definition.

A space allowance means the marginal space an item takes-up beyond it’s actual space. Let’s use an example: a 48” x 40” pallet uses the following formula to quantify actual square footage floor space usage:

Length times Width divided by 144 (inches in one square foot) equals actual square footage.
48 x 40 / 144 = 13.33 square feet.

Now this is the actual square footage this pallet takes up. Unless you have a warehouse building that measures exactly 48” x 40” including a dock door this space would be perfect for your needs. However, we all know there has to be more space that it takes to store a pallet in a “real” warehouse. You have a receiving area near your dock doors. You have aisle space to maneuver the pallets. You have space to segregate various SKU’s (stock keeping units) so one does not bury the pallet where it becomes inefficient to retrieve. You have doors and paths that cannot be blocked. You have restrooms, office areas, drinking fountain, etc...all use up warehouse space. Another important factor - unless your warehouse is 100% filled, you must include what we in the industry refers to “honeycombing” i.e. a certain amount of empty space that is never being used...I think you’re getting the message. That pallet is really using more than 13.33 square feet. But how much extra?

One way to determine “space allowance” is to actually measure all space in your warehouse that is not being utilized for actual storage space. As mentioned before this would include: Dock Areas, Staging Areas, Aisle Space, Fire Code Requirements, Door Openings, Restrooms, Offices, Machinery, Etc. and Honeycomb Annual Vacancies

Once you have the total “space allowances,” simply divide by the total space of your facility to get a “percentage of space allowance” e.g. if your total warehouse space is 100,000 square feet and your unused warehouse space is 40,000 square feet, then your space allowance is 40,000 / 100.000 = 40%. By the way, you may be surprised by the large percentage your actual space allowance will be. It is not unusual to find that 40% of your facility space is “fluff space.” Check it out at your own facility to see for yourself.

Once you have that percent you can then quantify your “actual floor space” an item takes up. This is done by the following formula:

Take your space allowance and then subtract it from 100%. Then take your actual space on an item and divide it by that number.

e.g. If you come up with a space allowance of 40% take 100% minus 40% which equals 60% (please remember when you quantify the percent of space allowance to subtract it from 100% so you get the true reciprocal for your calculation). If you figured your space allowance is 30% the reciprocal is 70%, if it is 20% the reciprocal is 80%, etc. Now take the actual space an item takes up and divide it by the reciprocal. That result will be the true amount of space an item takes up.

Let’s use an example of that 48” x 40” pallet: we showed the actual space was 13.33 square feet using the formula ( 48 x 40 / 144 = 13.33 square feet). Let’s say you quantified your space allowance in your warehouse is 40% which is subtracted from a 100% to give you a reciprocal of 60%, then simply divide the actual square footage of 13.33 square feet by 60% which results in a total square footage of 22.22. I realize that this is a far cry from the original 13.33 square feet but it is. in reality, the actual amount of space the item takes up.

Hope this helps you understand the “big picture” of space allowances. As you can see a little bit of math can be dangerous, but it’s better to know the truth.