Add together your beginning and ending inventories and divide by two to get an accurate average.ĭivide COGS by average inventory to get your inventory turnover ratio. ![]() ![]() Next, find out what your average inventory was during that same period. You can find this information on your income statement or by subtracting your ending inventory from your beginning inventory and adding any purchases made during that time. Here’s how to calculate it.įirst, determine the cost of goods sold (COGS) for the period you’re analyzing. This ratio helps you determine how quickly you are selling and replacing goods within a specific period, usually a year. How to Calculate Inventory Turnover RatioĬalculating your inventory turnover ratio is a crucial step in understanding the efficiency of your supply chain. Knowing this critical metric helps businesses optimize their operations and maximize profits while minimizing wastage and inefficiencies in their supply chain processes. Therefore, you may want to increase your procurement quantities or adjust prices accordingly.Īdditionally, monitoring your inventory turnover rate can help prevent losses due to obsolescence or spoilage since it encourages timely liquidation of existing stocks before they lose value. For instance, if you have a high inventory turnover rate in a particular product category, it could indicate strong demand for those items. A high inventory turnover ratio is desirable as it indicates that you are selling products quickly, whereas a low ratio implies slow sales and excess stock.īy keeping track of the inventory turnover ratio, businesses can make informed decisions about their purchasing practices, pricing strategies, and overall operations. It determines how many times you can sell and replace your inventory over a specific period, usually one year. Inventory turnover ratio is a crucial metric in supply chain management that measures the efficiency of your inventory management. Why is Inventory Turnover Ratio Important? By keeping this metric top-of-mind when making procurement decisions such as purchasing new inventories or adjusting pricing strategies will help ensure optimal efficiency within your supply chain management practices. Understanding your company’s Inventory Turnover Ratio is crucial for optimizing your supply chain operations by identifying areas where improvements can be made. ![]() This could lead to increased storage costs, reduced cash flow, and potential write-offs for unsold items. On the other hand, low Inventory Turnover Ratios suggest inefficiencies in managing stock levels or slow-moving products. It means that they are selling their products quickly and not holding onto excessive amounts of unsold inventory for long periods of time. For example, companies with high-value goods may have lower ratios due to slower sales cycles compared to businesses with low-cost products.Ī high Inventory Turnover Ratio indicates that a company has an efficient supply chain process in place. ![]() The Inventory Turnover Ratio can vary depending on the industry, business model, and product lifecycle. This ratio provides insights into how efficiently a company manages its inventory to meet customer demand while minimizing obsolete stock. Inventory Turnover Ratio is a metric that measures the number of times inventory is sold and replaced over a specific period. So buckle up and get ready to learn about one of the most important metrics in modern procurement! What is Inventory Turnover Ratio? In this blog post, we’ll explore what inventory turnover ratio is, why it matters for your business, how to calculate it, and some tips for improving it. This simple yet powerful measure helps you understand how efficiently your company is managing its stock and can provide valuable insights into ways to optimize your operations. Inventory management is a critical aspect of any business’s supply chain, and one key metric that every procurement professional should keep an eye on is the inventory turnover ratio. The Importance of Inventory Turnover Ratio in Your Supply Chain
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