Inventory Turnover Ratio | DOC Calculation | Supply Chain Planning
Inventory turnover ratio is a financial metric used to measure how efficiently a company manages its inventory. It indicates the number of times a company sells and replaces its inventory during a certain period, typically a year. The formula for calculating inventory turnover ratio is:
Where:
COGS (Cost of Goods Sold) is the direct costs of producing goods or purchasing finished goods that were sold during the period.
Average Inventory is the average value of inventory during the same period.
A high inventory turnover ratio generally indicates efficient inventory management, meaning the company is selling its goods quickly and restocking efficiently. Conversely, a low ratio may suggest overstocking or slow sales, which can tie up capital and increase holding costs.
Different industries may have different expectations for inventory turnover ratios due to variations in business models, product lifecycles, and supply chain dynamics. Comparing a company's inventory turnover ratio to industry benchmarks or historical data can provide insights into its performance and competitiveness.
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