Inventory Turnover Metric

Overview

The Inventory Turnover KPI measures how many times a year your organization is able to sell its entire inventory. To calculate inventory turnover, use the following formula:

Cost of Goods Sold ÷ Average inventory

Inventory turnover is an important indicator of the efficiency of your supply chain, the quality and demand of the inventory you carry, and if you have good buying practices. Generally speaking, a higher turnover rate is better, while a lower turnover rate suggests inefficiency and difficulty turning stock into revenue. Each type of industry will have different benchmarks and norms. For instance, a fresh produce supplier will have many more turns than a textile/clothing supplier.

Key terms

• Turns: The number of times a years all inventory is sold
• Average days to turn inventory: The number of days it takes to sell all on-hand inventory. Use the following equation: 365 ÷ inventory turn
• Cash-to-Cash Cycle Time: The time between when a business pays its suppliers and when the business receives payment from its customers

Success indicators

• A high inventory turn rate compared to industry norms.

Monitoring Supply Chain KPIs on a Dashboard

Once you have established benchmarks and targets for Inventory Turnover, you’ll want to establish processes for monitoring this and other supply chain KPIs. Dashboards can be critical in this regard. Read more