![]() ![]() ![]() A good rule of thumb for most industries is to keep the ITR between 5 and 10. A ratio of 5 may be too high for discount retailers but too low for car companies. However, the ideal inventory turnover rate may vary by industry. One turn indicates one batch of inventory you’ve sold and replaced during a particular period.Ī standard industry practice is to calculate ITR based on a 365 day period. I hope these basic formulas and steps help you in managing your inventory and improving the health of your company.Inventory turnover refers to the rate at which you sold out an inventory order over time. You would simply run a part usage report and take the top 20% of those parts to perform your analysis. In the Supply Chain world, you would want to perform these same calculations on a part-by-part basis as we did above. Financial analysts use this number on a quarterly, 6-month or annual basis to determine how healthy a company is in reference to managing their inventory business. Most distribution and manufacturing inventory facilities in the US, average a turn of 3.0.Ī 12-month turns and doh metric is not normally valuable for Supply Chain executives, inventory managers, materials managers, etc., because it does not give you anything tangible you can work with. Then when we add in carrying costs (described in later posts), we have improved the health of our inventory and companies value, significantly.įor inventory turns, take 30 (days in month) / DOH = Turns.ģ0 / 36.66 = 0.81, this is a very low turn ratio. We have just reduced our inventory cost by $6,250. If we reduced our inventory to what our suppliers could deliver plus some safety stock (described in later posts), let’s say 400, the inventory costs would be $2,000. Let’s look at it this way: If part #12345 has a piece cost of $5.00, then currently your inventory cost would be (1650 x $5.00) = $8,250. You are adding excess inventory cost when you may want to reduce that inventory closer to what your supplier can provide it to you. ![]() We will not be going into Lead Time in this post, but simply put, if your supplier has a lead-time of 7 days (which is 315 parts) and can deliver consistently, then why would you want 36.66 days worth. Now you may be asking yourself if this is a good number or not, well it depends on your supplier's Lead Time. This tells you that you have 36.66 days of inventory on hand for part #12345. Part #12345 has a current quantity of 1650 pieces and the average monthly usage ( total sold / 30) for that item during that month was 45. I prefer this way because I think DOH is a much more important metric that turns and it does not require COGS. There is also another (but similar) way to calculate DOH and Turns. The Inventory Turnover ratio and Days On Hand ratio are inversely related, as you can see if your turns are high, then your DOH will be low and if your turns are low (in this case), your DOH will be high. This means that the company, for its entire inventory in general, had an average of 218.5 days of inventory on hand. 365 are the most common but some analyst prefers to use 360. Inventory Days On Hand (DOH) = 365 or 360 / Inventory TurnoverĪsk your accounting or finance department what days to use in your calculation. Inventory Turnover (Turns) = $5,000,000 / $3,000,000 = 1.67ġ.67, this means that the company turned over its inventory 1.67 times during your time period and in this case, 12 months. Inventory Turnover (Turns) = Cost of Goods Sold (COGS) / Average Inventory The inventory values can be obtained from the Balance Sheet. ![]() Each item or SKU will have it’s own DOH, which will be explained later in this post.Ĭost of Goods Sold (COGS): Cost of Goods Sold is derived from the Income Statement you can get this from your accounting department for the period you are working in.Īverage Inventory depends on the time period you are working with, if you are working within a month, you take your total consumption of parts and divide by 30. For example, if you have 30 (DOH), that means your inventory has 30 days worth of inventory on hand during that period. The Inventory Days On Hand (DOH) ratio specifies how many days worth of inventory the company has at it’s disposal. The Inventory Turnover ratio measures how effectively a company is using its inventory. There has been so much written on these two Key Performance Indicators (KPI’s) but I wanted to give you my perspective on how I have trained my colleagues to which helps them understand these metrics. ![]()
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