Stock Turnover and How Much to Order

Stock is cash on a shelf. Too much ties up money, takes space and goes out of date. Too little means lost sales and expensive rush orders. Two measures help you find the balance: stock turnover for the business as a whole, and the economic order quantity (EOQ) for individual items.

Stock turnover

A business with £600,000 cost of sales and £100,000 of average stock turns its stock six times a year, so stock sits for about 61 days on average. Use the average of opening and closing stock if you have both. Compare with your own figures from previous years; turnover varies a lot between trades.

Economic order quantity

Every order has a cost: the time to raise it, check it in and pay the invoice, plus delivery. Every unit held has a cost too: storage, insurance, damage, going out of date and the cash tied up. Big orders mean few order costs but high holding costs; small orders mean the reverse. The EOQ is the order size at which the two add up to the least.

Where D is yearly demand in units, S is the cost of placing one order, and H is the cost of holding one unit for a year. H is often estimated as a percentage of the unit cost.

Worked example

A plumbers' merchant sells 2,400 of one valve a year. Each costs £12. Placing and receiving an order costs about £40, and the merchant estimates holding costs at 20% of stock value a year.

• Holding cost per unit: £12 × 20% = £2.40 a year.
• EOQ: √(2 × 2,400 × £40 ÷ £2.40) = √80,000 = 283 units.
• Orders per year: 2,400 ÷ 283 = 8.5.

The merchant currently orders 1,200 at a time, twice a year:

Ordering about 283 at a time saves around £840 a year on this one line. The holding cost uses the average stock, which is half the order size.

Calculate your stock turnover and EOQ

Using EOQ sensibly

• Round to pack sizes. Total cost changes very little near the EOQ, so rounding to a box or pallet costs almost nothing.
• Check for quantity discounts. A bulk price can outweigh the extra holding cost; compare the totals.
• Set a reorder point as well: the usage during the supplier's lead time plus a safety margin.
• Start with your biggest lines. Rank items by yearly value used. The top 20% usually account for most of the value.

EOQ assumes demand is steady. For seasonal or lumpy items, use it as a starting point and adjust.