Inventory Turnover

Inventory Turnover

KPI Details

Inventory Turnover is a vital KPI in Supply Chain Management that measures the rate at which a company's inventory is sold and replaced (i.e., "turned") over a given period of time. A relatively high value for this KPI indicates that the company's inventory is turned several times throughout the measurement period, but may also be a leading indicator of potential for backorders and/or a lack of cost avoidance within the procurement function (i.e., purchasing in bulk to replenish inventory, when possible, to reduce procurement costs). On the other hand, a relatively low value may indicate that the organization's purchasing/procurement, sales and related forecasting functions are not working in concert to determine the appropriate inventory levels based on forecasted demand.

KPI Definition

The number of times a company's inventory is sold and replaced over a set period of time. Can be calculated by dividing the cost of goods sold (COGS) by the average dollar value of inventory on hand during a defined selling period (monthly, quarterly, annually).

KPI Best Practices

• Review pricing strategy quarterly to determine most effective pricing levels of products
• Negotiate standard supplier lead times and use advanced shipping notifications to minimize carrying inventory
• Adjust inventory levels to seasonal patterns based on historical data

KPI Calculation Instructions Inventory Turnover?

Two variables are used to calculate this KPI: (1) the total Cost of Goods Sold for the period being examined, and (2) the average dollar amount of inventory on hand over the same period of time. The total Cost of Good Sold (COGS) can typically be found on quarterly and annual filings for any publicly traded organization (or within monthly P&L or income statements for a private organization). COGS includes the cost of materials sold, as well as any direct labor costs related to the manufacturing, sales and distribution of the goods. The average dollar amount of inventory on-hand can be calculated by taking the sum of the inventory value on hand at the beginning and end of the measurement period and dividing that value by 2.

KPI Formula :

Total Cost of Goods Sold / ((Inventory Value at Start of Measurement Period + Inventory Value at End of Measurement Period) / 2)