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Inventory Turnover is a crucial KPI reflecting how often a business replenishes its stock over a certain period. It's vital for assessing inventory management efficiency, cost control, and sales effectiveness. In this article, we're breaking down the significance of Inventory Turnover, its calculation, benchmarks for comparison, and strategies for improvement.
Inventory Turnover measures the rate at which a company's inventory is sold and replaced within a given period. This KPI helps businesses optimize inventory levels, reduce holding costs, and ensure products remain fresh and aligned with customer demand.
This metric indicates the liquidity of a company's inventory, showing if the stock aligns with market demands. High turnover can suggest strong sales or effective inventory management, while low turnover might point to overstocking or product obsolescence risks.
Inventory Turnover is calculated with the following formula:
Inventory Turnover = Cost of Goods Sold / Average Inventory
The average inventory is often calculated as the sum of beginning and ending inventory for a period, divided by two. If the COGS is $1,000,000 and the average inventory is $250,000, the Inventory Turnover is 4 times per year.
Benchmark values for Inventory Turnover rates vary across industries. Generally, higher rates are more favorable, but the most effective benchmarks are those in line with industry norms and past company performance.
By concentrating on Inventory Turnover and executing targeted projects for its improvement, businesses can significantly refine their supply chain operations, leading to enhanced profitability and customer satisfaction.
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