Summary:
In this post, we will a common metric used in inventory management called Inventory Turnover
Description:
In simple terms,
Inventory Turnover = Sales / Inventory
why do we want to measure this?
A business manager can analyze this metric to figure out the efficiency of sales and efficiency of buying.
A high over turnover equals strong/efficient sales OR inefficient buying process. It can also show loss in business due to lack of goods supply.
A Low turnover equals inefficient sales or marketing efforts and excess inventory.
How do you benchmark inventory turnover?
usually, it’s bench-marked against Industry average. You don’t want to benchmark a company selling Auto Spare Rates versus a company selling dairy products because company selling dairy products (perishable goods) would have a high turnover ratio since they move inventory fast.
Conclusion:
This was a high level discussion of a business metric “Inventory Turnover” commonly analyzed by business managers to keep an eye on their sales and buying efficiencies. of course, the use of the formula would involve interviewing business managers to understand how they measure inventory turnover but whatever the formula may be it should ideally be consistent across the organizations.
Here are some links if you want to research further:
http://www.investopedia.com/terms/i/inventoryturnover.asp
http://www.accounting-basics-for-students.com/cost-of-goods-sold.html
http://accountingexplained.com/financial/ratios/inventory-turnover