Inventory Management: Stock Breaks and Turnover Analysis

Stock Break

The stock break occurs when existing stocks are insufficient to cover ordinary consumption needs. There are two variants:

• Low stock fulfilled: This indicates that the current stock has proven insufficient.
• Low stocks reached: Low stocks have reached the established minimum level.

In the first case, the low stock level is outdated, and the company must study the current situation and its needs to determine a new minimum stock level. In the second case, provisioning has been carried out, and it is necessary to determine why the established low levels were not respected.

Store managers often prepare monthly stock break reports containing the following data:

• Date of the report
• Report name and product code
• Product description
• Material stock unit (maximum and minimum levels)
• Applied quantity
• Date in the month when the break occurred
• Quantity demanded
• Time for order delivery
• Signature of the storekeeper

These reports are sent to the Purchasing Department for product stock applications. The stock turnover report helps us know the real situation and compare it with what is recorded in the books.

Provisioning Time

This is the time that elapses from when a material is needed until it enters the warehouse reception. The firm's objective is to minimize this time. It includes the purchasing process, order placement, negotiation with suppliers, etc.

Stock Turnover (Inventory Rotation)

This measures how many times inventory is sold or used during a specific period, typically one year. A low rotation index indicates that a material is stagnant in the store.

The warehouse department annually prepares material rotation reports. There are two types of indices:

• Physical rotation: Estimated in physical units of movement.
• Economic rotation: Estimated in monetary units.

The formula for economic rotation is:

$$\text{TURNOVER INDEX} = \frac{\text{ANNUAL SALES}}{\text{ANNUAL AVERAGE STOCK VALUE}}$$

Where:

$$\text{ANNUAL AVERAGE STOCK VALUE} = \frac{\text{SUM OF AVERAGE MONTHLY VALUE OF EACH STOCK}}{\text{12}}$$

Rotation indices provide information on stock levels, which must be analyzed through comparative study. Current year indices should be compared with:

• Indices from previous years.
• Budgeted data versus actual data for the period.
• Data from other companies in the same activity.

Coverage Index

This ratio is calculated alongside the rotation index. It is the inverse of rotation:

$$\text{COVERAGE INDEX} = \frac{1}{\text{ROTATION INDEX}}$$