Average Age of Inventory
Average age of inventory is another way of looking at inventory turnover. This ratio takes inventory turnover ratio and divides it into 365 days. The formula for average age of inventory is:
Average age of inventory = 365 days / inventory turnover.
In the example in inventory turnover CVS had a fiscal year ended 12/31/06 inventory turnover of 4. The average age of inventory was:
Average age of inventory = 91 days
For the fiscal 3rd quarter ended September 30, 2007 CVS had an inventory turnover of 8. The average age of inventory was:
Average age of inventory
= 365 / 8
Average age of inventory = 46 days
In an analysis of CVS it can be seen that they have significantly increased the management of their inventory. So long as it did not result in lost sales from too low an inventory level or stock-outs, CVS inventory control improved.