Average Age Of Inventory

If you're Ray-Ban sunglasses, the average age of your wayfarer brand that has been a hot seller since 1962 probably doesn't matter. If you, in fact, manufactured them in 1962, it is likely you would have paid a lot less than it costs you today to manufacture the same glasses, but little else will have changed. And, in reality, most companies go through all of their inventory within their current year.

So while this structure doesn't matter as applied to sunglasses, which last forever, think about average age of inventory as regards an egg farm. An hour after Henny Penny has pooped out an egg, it begins a process of going bad. And after a week or two, it is probably fertilizer. So tracking that average as it applies to volatile inventory matters a lot.

But average age refers to another, potentially more important metric, which reflects how quickly a company's inventory is turning over.

So think about two extreme cases. Black & Decker hammers have become the darling of drug dealers and other mob money collectors. Supplies have been flying off the shelves, and the CFO of B&D notes in the quarterly conference call that the average age of his hammers in inventory has gone from 47 days to just 32 days. This metric may be a problem, in that the company has to produce more inventory to keep on hand, but for most companies, it's a good problem.

At the other end of the inventory spectrum, with the failure of most male enhancement drugs, sales of tape measures have flagged dramatically. Stanley Toolworks notes that the average age of their 24-foot stallion model has ballooned from 23 days to 34 days, and they probably have a problem.

The gist is that the age of inventory reflects sales volume as well as the efficiency of capital management, i.e. capital invested in a company's inventory, which is a bit like Goldilocks' porridge. Company managers seek that inventory to be not too hotly turned over, not iced, but rather living somewhere in the middle.