What does “inventory turnover” measure?

“Inventory turnover” is a key performance metric that assesses how often a company sells and replaces its inventory during a specific period, typically a year. This measurement is crucial for evaluating the efficiency of inventory management practices and is indicative of how well a company converts its inventory into sales. A high inventory turnover ratio suggests that a business is effective in selling its products, which can lead to increased revenue and reduced holding costs for unsold inventory.

This concept is tied closely to supply chain efficiency and profitability, as frequent sales can help minimize excess stock and associated storage costs. Businesses strive for an optimal turnover rate that reflects both product demand and operational capabilities, ensuring they are not overstocking or understocking.

Other options address different aspects of inventory management or customer relations. While total inventory levels, storage costs, and customer satisfaction are important considerations in business operations, they do not directly measure the frequency of inventory sales and replacements, which is the essence of inventory turnover. Thus, the focus on how frequently inventory is sold and replenished clearly defines why the correct answer is significant in evaluating business performance.