Raw Materials Expense as a Percentage of COGS

Raw Materials Expense as a Percentage of COGS

KPI Details

Raw Materials Expense as a Percentage of COGS measures the expense incurred through purchasing raw materials (i.e., the materials directly used in the production of a product) in relation to the cost of goods sold (COGS) incurred by the plant, or production facility, over the same period of time. Excessive expenses spent on raw materials may be related to multiple factors, including inefficient procurement processes (i.e., purchasing unneeded or overly expensive raw materials), low quality of raw materials purchased (such low quality materials can cause in increase in rework due or scrap rate due to a high number of defects), inaccurate demand forecasting methods and sub-par production employee training and performance. High values for this metric can drive up the prices of the finished products which can make them that much more difficult to sell to customers. Such unmanageable prices can, furthermore, expose the company to reputational and financial risks born from not being able to pay off its liabilities on time and high degrees of customer dissatisfaction.

KPI Definition

The expense incurred through purchasing raw materials divided by the total cost of goods sold (COGS) incurred over the same period of time, as a percentage.

KPI Best Practices

• Implement continuous improvement techniques, such as Lean Six Sigma, to minimize scraps and defects
• Evaluate alternative suppliers each year to identify opportunities for cost reduction
• Negotiate discounts with suppliers for timely payment of invoices
• Regularly update forecasted demand to avoid excess raw materials inventory

KPI Calculation Instructions Raw Materials Expense as a Percentage of COGS?

Two values are used to calculate this KPI: (1) the expense incurred through purchasing raw materials, and (2) the total cost of goods sold (COGS) incurred by the plant, or production facility, over the same period of time. 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. COGS includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. Do not include indirect expenses such as distribution costs and sales force costs in the denominator.

KPI Formula :

Materials and Components Expense as a Percentage of Plant Revenue, Days on Hand: Raw Materials, Inventory Turnover (Raw Materials Only)