* Is High or Low Best: Higher is Better
Inventory Turnover (Raw Materials Only) measures the rate at which a company's inventory of raw materials is used and/or 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 of raw materials 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 of raw materials, 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 of raw materials based on forecasted demand.
An indication of how many times a company's inventory of raw materials is used and/or 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 raw materials on hand during a defined selling period (monthly, quarterly, annually).
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 raw materials 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 raw materials on-hand can be calculated by taking the sum of the raw materials value on hand at the beginning and end of the measurement period and dividing that value by 2. Raw materials should be defined as the parts directly used to manufacture a product (e.g., lumber, paper, etc.). Do not include indirect raw materials (e.g., wood finish placed on a manufactured chair, etc.) in this calculation.
Total Cost of Goods Sold / ((Inventory Value of Raw Materials at Start of Measurement Period + Inventory Value of Raw Materials at End of Measurement Period) / 2)
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