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.

Related or Semi-related Video

Finance: What is Inventory Turnover?2 Views

00:00

Finance allah shmoop What is inventory turnover All right well

00:07

this is inventory and this is a turnover Okay so

00:11

what is it really Well you have inventory I'ii stuff

00:14

you want to sell and then you sell it You

00:16

started the year with a thousand edible necklaces The pumpkin

00:20

spice model promises to be very popular anyway You sold

00:23

them for ten dollars each So you have ten grand

00:26

in inventory But you did five hundred eighty thousand units

00:31

of sales inventory turnover Big Really big five hundred eighty

00:36

times big Okay different story Your tesla You have one

00:40

hundred tires in inventory You had that same number january

00:43

one in april twelfth In july twenty third and december

00:47

Thirty one of this year One hundred tires steady state

00:50

But you sold fifteen thousand cars in a year We'll

00:53

let four tires apiece Yeah That's a sixty thousand tires

00:57

And we're not counting that thing in the trunk It's

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Not really a tyre anyway It's More like a bicycle

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tire Enormous inventory turnover Sixty thousand over one hundred or

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six hundred Ex enormous inventory turnover Very efficient use with

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the capital spent on those hundred tires Well so why

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Does inventory turnover even matter Alright Yeah it's about capital

01:16

We hinted you there Think about your capital needs Like

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if you have to raise tons of money to store

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tons of inventory that you take forever to sell Well

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then you're not using your capital very efficiently Like why

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not make the tire manufacturers who are actually in the

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business of building distributing and planning for tyre demand Why

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not make them hold all the inventory using their capital

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not yours Well not all inventory turnover numbers mean the

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same thing like what's inventory in an oil rig leasing

01:47

company Well you keep eight rigs on hand you know

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you'll have to tow them out to the middle of

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the ocean At some point they're crazy expensive to build

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and maintain and some years when oil is really cheap

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there just won't be any demand for your rigs for

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drilling so you'll have to store him and oil them

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and wave to them kindly So how do you make

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sense out of that number like oil rig Turn over

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when you're comparing it to say a grocery stores turnover

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where the average six pack of diet coke last like

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fifty three hours on the shelves made so inventory turnover

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is really more of a quote relative to last year

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unquote thing or a quote relative to our hated competitors

02:28

bob unquote kind of thing And there are ways to

02:31

game this data point as well the easiest of which

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is well too Just let your inventory amount fall like

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if you started the year with a thousand naked cupid

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hood ornaments and let supplies dwindled to just two hundred

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while then via industry norms of just taking the average

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quarterly inventory levels through the year Well you might show

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an average inventory of six hundred units this year thereabouts

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and you'd be going into the next year with only

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two hundred and generated a lot of cash along the

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way Like you turned all that money that was tied

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up in your inventory in the cash on your bottom

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lines that good Is it bad Well just like pretty

03:04

much everything in from of finance videos and diapers it

03:07

depends Well it's good to have low inventory to a

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point What happens if you run so low that customers

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can't buy from you because you can't fill orders for

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three months and then they go to bob than the

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cost of not having enough inventory was massive You lost

03:23

sales profits and market share or power or theft and

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it hurt your brand like people don't respect it as

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much anymore Yeah sorry just keeping it real But in

03:31

general high turnover is good It means you're using your

03:35

inventory capital of the capital you spent to build your

03:38

inventory efficiently and that when you make it to the

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top of the hill you're you know able to keep 00:03:43.925 --> [endTime] your balance Yeah

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