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Question: Parts sales, excluding VOR and all external sales are recorded at $1,923,361 with a total gross profit of $461,606. Currently, True Stock Turn is 4 times per annum, and stock is to be reduced to bring True Stock Turn up to 5 times per annum. What will be the savings in the investment in parts stock?

Jeff Smith explains the answer to the KPI Challenge



Answer:
True stock Turn excludes VOR and any purchases other than from stock and it's also calculated from the cost of sales, not the Turnover.(Turnover less Gross Profit will give you the Cost of Sales).

$1,923,361 - $461,606 = $1,461,755

Now you have the Cost of Sales, True Stock Turn is said to be 4 times, therefore divide the Cost of Sales by 4 to get the Stock Value.

$1,461,755 divided by 4 = $365,438

If True Stock Turn is improved to 5, then the stock value required would reduce:
$1,461,755 divided by 5 = $292,351

The answer to the question is the value of the stock reducion:
$365,438 - $292,351 = $73,087

You can find out more about the various different Stock Turns
and the industry benchmarks in The KPI Book Second Edition
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