While inventory turnover ratio seems like a pretty straightforward calculation, there are some things you need to consider when evaluating it, including:
- Inventory turnover ratio must be evaluated alongside of stockout statistics. If your inventory turnover is really high, but your number of stockouts are too, that's not good inventory management. That's putting your organization at a competitive disadvantage.
- A common mistake when calculating the inventory turnover ratio for the entire inventory is to use the price of the inventory when you sell it, rather than your cost.
- You'll often see the denominator of the inventory turnover ratio expressed as "average inventory" in either quantity or monetary figures. In the article, I used an expanded denominator to show you how average inventory is calcualted. This helps prevent "guesstimates" that can distort your true inventory turnover ratio.
- There is no "one-size-fits-all" ideal inventory turnover ratio. It varies from company to company and from item to item. While you may be able to find benchmarking statistics for your industry from an industry or supply chain trade association, most often organizations compare their inventory turnover ratio to past performance and look to increase their inventory turnover ratio from the previous year while reducing the number of stockouts.
Inventory turnover ratio is a very important and widely-used metric. Use it wisely and avoid some common mistakes and you can sell your value to management.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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