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    Inventory Turn Over Ratio

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    Ravi Shankar
    This document discusses inventory turnover, which is a key performance indicator that measures how many times a company's inventory is sold and replaced over a period by calculating the cost of goods sold divided by the average inventory. A higher inventory turnover ratio indicates more efficient operations. The document provides examples showing how increasing inventory turnover from 2 to 4 times annually doubled a company's return on investment by reducing the amount of capital tied up in inventory. While aiming for the highest ratio possible is not always best, companies can use inventory turnover to benchmark their performance against industry standards and competitors over time.

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    Inventory Turn Over Ratio

    Uploaded by

    Ravi Shankar
    157 views2 pages
    This document discusses inventory turnover, which is a key performance indicator that measures how many times a company's inventory is sold and replaced over a period by calculating the cost of goods sold divided by the average inventory. A higher inventory turnover ratio indicates more efficient operations. The document provides examples showing how increasing inventory turnover from 2 to 4 times annually doubled a company's return on investment by reducing the amount of capital tied up in inventory. While aiming for the highest ratio possible is not always best, companies can use inventory turnover to benchmark their performance against industry standards and competitors over time.

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    This document discusses inventory turnover, which is a key performance indicator that measures how many times a company's inventory is sold and replaced over a period by calculating the cost of goods sold divided by the average inventory. A higher inventory turnover ratio indicates more efficient operations. The document provides examples showing how increasing inventory turnover from 2 to 4 times annually doubled a company's return on investment by reducing the amount of capital tied up in inventory. While aiming for the highest ratio possible is not always best, companies can use inventory turnover to benchmark their performance against industry standards and competitors over time.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    157 views2 pages

    Inventory Turn Over Ratio

    Uploaded by

    Ravi Shankar
    This document discusses inventory turnover, which is a key performance indicator that measures how many times a company's inventory is sold and replaced over a period by calculating the cost of goods sold divided by the average inventory. A higher inventory turnover ratio indicates more efficient operations. The document provides examples showing how increasing inventory turnover from 2 to 4 times annually doubled a company's return on investment by reducing the amount of capital tied up in inventory. While aiming for the highest ratio possible is not always best, companies can use inventory turnover to benchmark their performance against industry standards and competitors over time.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 2

    MC44 – Inventory Turnover (1)

    By Kowboy | February 26, 2009

    Inventory Turnover is a prominent KPI in a lot of businesses. This post will give you some
    understanding on the concept. In another post I will give details on how the SAP report MC44 can
    be used to measure inventory turns and what data is used to calculate this ratio.

    FORMULA

    Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory at value

    If you are not familiar with the term Cost of Goods Sold, this is the cost of your revenues.

    Average Inventory is measured in value and not in volume.

    If you divide both elements you know how often you sold you’re average inventory. “So what?”
    you ask. I will explain next.

    CONCEPT AND USE

    I will present you with two business scenario’s to point out the significance of the Inventory
    Turnover ratio.

    SCE NARIO 1

    You sell one product. You invest 10.000 EUR as starting stock. You run your business for one year
    and at then end of the year you are completely sold out. Your revenue accumulates to 12.500
    EUR. For simplicity sake your gross profit is 2.500 EUR (12.500 – 10.000).

    Revenue = 12.500

    COGS = 10.000

    Average Inventory = 5.000 (10.000 starting stock + 0 end stock / 2 = 5.000 average stock)

    Inventory Turnover = 2 (10.000 / 5.000)

    ROI = 50% > 2.500 (R-C) earned out of 5.000 (A)

    SCENARIO 2
    Again you sell one product. But this time you invest 5.000 EUR in starting stock. After 6 months
    you sold your stock and you replenish your stock again for 5.000 EUR. After another 6 months
    you’re sold out. Your revenue is again 12.500 EUR. Your gross profit is 2.500 EUR (12.500 –
    5000 – 5000).

    Revenue = 12.500

    COGS = 10.000

    Average Inventory = 2.500 (5.000 starting stock + 0 end stock / 2 = 2.500 average stock)

    Inventory Turnover = 4 (10.000 / 2.500)

    ROI = 100% > 2.500 (R-C) earned out of 2.500 (A)

    Conclusion

    Looking at the two scenarios the increased inventory turnover means increased operating
    efficiency: your ROI increased from 50% to 100%! Obviously you invested half the money in
    scenario 2 to achieve the same profits.

    This doesn’t mean businesses should try to achieve a maximum inventory turnover per se.
    Achievable ratios differ per material type (finished goods, semi or raw), but also per moving speed
    (ABC class). Last but not least the type of industry very much determines what ratio you can
    achieve: process industries typically have higher inventory turns than, say, heavy equipment
    manufacturers.

    You can find out what the industry standards are by purchasing metrics from data suppliers like
    Reuters or Gartner. This will give you an idea how well you are doing compared to your
    competitors. Or you can just use inventory turnover as an internal benchmark. In this case you
    periodically review the inventory turnover for different sets of materials and set targets that you
    wish to achieve.

    Inventory turnover is typically a financial measurement (see relation to ROI). In order to improve
    the ratio, close cooperation with procurement/production planning is required, since they directly
    influence the stock levels.

    Again, as with many KPIs and reports don’t judge based on this value alone, but use other stock
    controlling reports to minimize your inventory and still have a sound service level.

    Finally you can read an interesting business case on how inventory turns made Dell a leader in it’s
    business.

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