It provides an estimate and does not guarantee accurate results, which may be manipulated. The figure of inventory at the end of the year should not be taken for calculating stock velocity because normally the stock at the year end is low. 2. Inventory turnover, also known as stock turnover or merchandise turnover, is a ratio that shows how many times a company's inventory has been sold and replaced within a given period (usually per season or per year). Any lower and it's a sign that products aren't selling fast enough and your shelves are overstocked. Force Automation, Configure, The inventory/material turnover ratio (also known as the stock turnover ratio or rate of stock turnover) is the number of times a company turns over its average stock in a year. This cost includes all direct materials, direct labor, and factory overhead associated with the construction of the finished goods or services that were sold. Maybe. Some companies retain ownership of their goods at consignee locations, which increases the amount invested in inventory. Since the balance sheet tells the financial condition of a company at the end of the period, we take Average Inventory for the year in our calculation. It can also help them identify inefficiencies and other issues in the sales pipeline. When choosing business software, this is something to think about. The inventory turnover ratio is a simple ratio that helps to show how effectively inventory can be managed by comparing average inventory and the cost of goods sold for a particular period. When there is a low rate of inventory turnover, this implies that a business may have a flawed purchasing system that bought too many goods, or that stocks were increased in anticipation of sales that did not occur. If you know what your average turnover rate isand, more importantly, what it should beyou can accurately forecast what youll need to stay replenished without overstocking. Inventory can be manipulated easily and lead to significant issues while preparing the financial statements at the end of the accounting period. Inventory turnover ratio: 10,000 / 5,000 = 2 times. Make sure you take them from the same time frame (year, quarter, or month): COGS refers to how much a company spends to produce or buy its inventory. indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. Knowing this will help assess the efficiency of inventory management as well as the sales cycle. To find the inventory turnover ratio, we divide $47,000 by $16,000. Inventory turnover ratio is a ratio that shows how many times a company has replaced and sold inventory during a period, say one year, five years, or ten years. While that may help you get more product out the door, its a slippery slope. Accessories, Software & Technology Inventory turnover. Computerized point-of-sale systems and enterprise asset management software immediately reflect changes in inventory by tracking sales and inventory depletion or restocking. Knowing your turnover ratio depends on effective inventory control, also known as stock control, where the company has good insight into what it has on hand. There are two variations to the formula to calculate the inventory turnover ratio. When the inventory turnover ratio is low, it indicates that a business has too much inventory on hand. Lower input costs and higher sales contribute to an increase in the ratio. However, there are exceptions to this rule. Many tend to fall between 5 and 10, which means they sell and restock every month or so. Within the mattress industry, for example, Sleep Numbers inventory turnover ratio is 9.68 while Purples is 6.39. It is possible that some of the sales lost from doing so will be recovered when customers instead purchase from the remaining product selection. We can also calculate the days which are utilized to sell the inventory by the following formula: Average days to sell inventory = 365/ Days Inventory Turnover Ratio. Otherwise, a business will find itself with a large number of unused components that it may trouble getting rid of. . Inventory turnover can be improved simply by rooting through the warehouse and disposing of any inventory items that have not been selling. The average inventory turnover period equals (show your answer to 2 decimal places ) b. Here are some reasons why good management of your inventory matters: Theres a lot that goes into inventory management. If a business finds that its inventory turnover is slowing down, this is a strong indicator that it should alter its purchasing practices to acquire a reduced amount of goods. A farmer doesnt need to purchase a new tractor annually, and most people arent scooping up designer jewelry on a whim. In many cases, retailers use a vertical-specific inventory method, known as cost-to-retail, that estimates the ending inventory value by using the ratio of inventory cost to the retail price. Its called Days Sales of Inventory (DSI) and the formula looks like this: Days Sales of Inventory = Average Inventory COGS 365. Inventory turnover is a ratio that measures how many times a company's inventory is sold or used in a period. Total inventory turnover is calculated as: $8,150,000 Cost of Goods Sold / $1,630,000 Inventory = 5 Turns Per Year The 5 turns figure is then divided into 365 days to arrive at 73 days of inventory on hand. When a manufacturer dictates the minimum, or maximum, amount you may sell an item for, that limits your ability to use price as an inventory lever. This means the company takes around 248 days to sell all the finished goods. This means that there would be 2 inventory turns per year. Availability, Business The 5 turns figure is then divided into 365 days to arrive at 73 days of inventory on hand. Sales or Consumption: the sales made over that same period. Are salespeople underperforming? & Logistics, NetSuite Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Companies that use the perpetual inventory method versus a periodic inventory system can use a moving average inventory to compare mean inventory levels across multiple time periods. We already know the inventory turnover ratio is 3. The inventory turnover ratio is a simple method to find out how often a company turns over its inventory during a specific length of time. Therefore, this states that the company sells or utilizes its inventory 2.5 times over the specific period and takes 148 days to sell its stock on average. Improve forecasting. A further concern with low inventory turnover is that goods not being sold are taking up valuable shelf space that could be more profitably taken up by other products with better sales potential. What is inventory turnover? The number of times the firm's inventory is sold or used over a specific period. . Luxury goods sellers like high-end jewelry or custom vehicles, on the other hand, typically have lower inventory turnover thanks to longer production times and sales cycles. Hiding some important details about the inventory of the company from the users of the financial information is against the full disclosure and materiality principle of accounting. If items just wont sell, consider donating that stock to charity and taking a tax deduction or offloading it through a secondary channel. All Rights Reserved. An alternative is to eliminate those product versions with low sales levels, thereby also eliminating the associated inventory investment. The inventory turnover ratio is a type of financial ratio which is commonly used to measure the number of times inventory is sold or replaced during a given period. If you are not in that group, you may go to the back of the line. Also, understanding how inventory demand changes is critical, too. The latest trends in business, marketing & web design. A ratio that is too high, however, is self-defeating. Thatll give you a good range to shoot for instead of just one number to try and match. If setup costs are high, it makes more sense to have longer production runs, to keep the average cost per unit down. However, it may also mean that a business does not have the cash reserves to maintain normal inventory levels, and so is turning away prospective sales. A higher ratio indicates that the company's product is in high demand and sells quickly, resulting in lower inventory management costs and more earnings. & Reporting, Customer Got capital + commitment? DOH = \frac {365\ or\ 360} {Inventory\ Turnover} DOH = I nventory T urnover365 or 360. Your inventory turnover is one of those key performance indicators you have to keep tabs on regularly. Unless this issue is addressed, a business will find that it must periodically eliminate obsolete inventory from stock. Inventory Turnover Period 247.68. Sales for the period ended 1 January 2016 to 31 December 2016, the . Standard costs. Average inventory smooths out the amount of inventory on hand over two or more specified time periods. This can indicate that its products are popular with customers, are being sold at a competitive price, or are being bolstered by a strong marketing campaign. tab), (opens in a new If management wants to fulfill most customer orders at once, this requires the maintenance of a larger amount of stock on hand. While a high level of inventory turnover is an enticing goal, it is quite possible to take the concept too far. & Technology Companies, Transportation By waiting too long to dispose of obsolete inventory, a business is reducing the amount of cash that it can collect from its disposition. Distribution, Performance In short, marketing activities should be planned based on the inventory turnover trend for specific inventory items. A lower ratio can point to weak sales and/or decreasing market demand for the goods. Calculating and tracking inventory turnover helps businesses make smarter decisions in a variety of areas, including pricing, manufacturing, marketing, purchasing and warehouse management. More about inventory turnover (days) . A higher turnover rate specifies inadequate inventory levels, which may lead to a loss in business as the inventory is too low, resulting in stock shortages. It also implies either poor sales or excess inventory. A high ratio is always favorable, as it indicates reduced storage and other holding costs. This is because a push system is based on estimates of what will be sold, while a pull system is based on actual customer orders. Inventory turnover ratio is an efficiency ratio that measures how efficiently inventory is managed. For most sectors, a reasonable inventory turnover ratio ranges between 5 to 10. If the ending inventory figure is not a representative number, then use an average figure instead, such as the average of the beginning and ending inventory balances. It can be possible with effective advertising of the products or sales promotion in the market. We can find the inventory turnover by dividing the cost of goods sold ( $5,000,000) by the average inventory. The amount of inventory sold depends on the price being charged for it. If the inventory ratio is too high, meaning somewhere in the double digits, then your company is limiting its revenue by curtailing sales to fit a too-small inventory supply. Alternatively, a high rate of inventory turnover will mandate more frequent and/or larger purchases. It's commonly advised to use the second method, which uses the cost of goods sold (COGS) data. Consider training to address the way purchasing decisions are now made, or stress the need for sales leaders to come to the table with realistic, not overly optimistic, projections. Inventory turnover is measured by a ratio that shows how many times inventory is sold and then replaced in a specific time period. A low inventory turnover ratio is a signal of inefficiency, since inventory usually has a rate of return of zero. Inventory turnover is a very useful way of seeing how efficient a firm is at converting its inventory into sales. Land More Interviews | Detailed Bullet Edits | Proven Process, Land More Offers | 1,000+ Mentors | Global Team, Map Your Path | 1,000+ Mentors | Global Team, For Employers | Flat Fee or Commission Available, Build Your CV | Earn Free Courses | Join the WSO Team | Remote/Flex, WSO Free Modeling Series - Now Open Through, +Bonus: Get 27 financial modeling templates in swipe file, 101 Investment Banking Interview Questions. Days Sales of Inventory or Days Inventory. It can be calculated in two ways. A company may buy raw materials in large quantities in order to obtain lower bulk rates, though this increases its inventory investment. Automate purchase orders. While a fast inventory turnover is ideal, its a subjective measurement and needs to be considered alongside factors like industry, time of year, current demand from the target market, as well as supply chain availability. For industries with perishable goods, such as florists and grocers, the ideal ratio will be higher to prevent inventory losses to spoilage. The method for allocating overhead to inventory may change, such as from using direct labor hours as the basis of allocation to using machine hours used. The inventory turnover ratio is calculated by dividing the cost of goods by average inventory for the same period. In manufacturing, the inventory accounted for when calculating the inventory turnover ratio includes finished goods, raw materials, and work-in-progress goods. When there is a high rate of inventory turnover, this implies that the purchasing function is tightly managed. If we wanted to know home many days it takes The Home Depot to turn its inventory once, we could divide the number of days in the year by the inventory turnover ratio we just calculated. Services, System Your website builder, for instance, should be helping you manage your inventory. Generally, a higher ratio is better because it means strong sales are depleting your stock at a rapid pace. In the second example, well use the same company and the same scenario as above, but this time compute the average inventory period meaning how long it will take to sell the inventory currently on hand. As the example indicates, marketing is an especially useful tool for eliminating slow-moving inventory. As an example, a retailer might group categories to see how products are performing against others in your portfolio. As the name of the ratio implies, by calculating the inventory turnover you will understand how your inventory . Suppliers with the lowest prices may or may not be the best choice. Beginning Inventory + ending inventory / number of months in the accounting period. Info. Inventory turnover is the average number of times in a year that a business sells and replaces its inventory. Researched and authored by Vanshika Nakul | LinkedIn, Reviewed and edited by Divya Ananth | LinkedIn. If you know what sort of ratio to shoot for, youll be able to make smart money decisions when it comes to spending and pricing. Average inventory is the average value of your inventory. It is especially important to eliminate obsolete inventory from stock as early as possible, when these goods still have some market value, and so can be sold off at a reduced loss. The number of days or months the inventory converts into sales determines the cash conversion cycle Determine The Cash Conversion Cycle The Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. Inventory turnover is typically measured at the SKU (stock-keeping unit) level, or segment level for tighter controls on specific stock levels. Whether you create a website to sell your goods online or you plan to sell primarily at a brick-and-mortar locationyour inventory turnover is an important metric to understand. Solution: (i). If standard costing is used, the standard cost applied to an inventory item may diverge from its actual cost. The owner of TechTronics Ltd has asked you to calculate the Average Inventory Turnover Period. If you can predict when theyre coming and what kind of inventory levels are needed at that time, youll minimize any possible issues. Where: Days in Period - The number of days in the period (if using annual reports, the tool internally uses 365 days, vs. 91 for quarterly); Inventory Turnover - The average inventory at the beginning and end of a period. Obsolescence. If you sell a diverse array of products, understand that not all of them will sell at the same rate. Thus, there is a natural limit to the amount of inventory turnover that your customers will tolerate, just based on the duration of order backlogs. It is an efficiency rate that shows how effectively companies manage the inventory. However, rapid turnover can also indicate that the business does not have sufficient working capital to support a larger inventory. Automation, NetSuite The latest versions of the iPhone, Mac, and other top products are going to fly off the shelves before they even launch. Doing so can substantially increase the investment in inventory. Then consider adapting your purchasing policy and processes accordingly to prevent tying up too much capital in inventory. For example a ratio of 26 implies that inventory is held, on average, for two weeks (365 days in a year divided by . A higher ratio tends to point to strong sales and a lower one to weak sales. Average inventory may be derived by adding together the beginning and ending inventory values and dividing by two. It is the ratio of cost of goods sold by a business during an accounting period to the average inventories of the business during the period (usually a year). Inventory turnover can be improved through the use of just-in-time manufacturing systems, where inventory is only produced when there is a customer order in hand, and little inventory is maintained anywhere in the system. One thing to compare them to is the industry-wide ratio. Inventory turnover is an indicator of the . Automate your inventory and order management systems. How to Calculate Inventory Turnover Ratio (ITR)? For example, consumer packaged goods (CPG) usually have high turnover, while very high-end luxury goods, such as luxury handbags, typically see few units sold per year and long production times. Success, Support Are you not selling enough because youre charging too much? These are all important decisions for a company to remain financially healthy and competitive, it needs to keep its product mix aligned with customer demand. $ Cost of goods sold Calculate your average inventory cost for the year by adding 12 months of ending inventory balances together and dividing by 12. They also wont be distracted by a new sales event every time they visit your shop. A low ratio needs some inventory analysis to discover the cause. Inventory Turnover = Cost of goods sold/ Average value of the inventory = 80,000 + 10,000 - 20,000/ . If you are calculating a global indicator, it is better to take a long enough period, I recommend 1 year or 365 days. The average turnover rate helps companies determine how frequently to update and manage their inventory in order to optimize profitability. Price, Quote, Reporting You can use ending stock in place of average inventory if the business does not have seasonal fluctuations. This is a good way to avoid having to take obsolete inventory write-offs later on. For example: Cost pools. Service Management, Partner The opening and closing inventory balances are $9,000 and $7,000 respectively. This is a strategy issue; management should be aware of the inventory investment required if it insists on implementing a fast fulfillment policy. When prices must be dropped, this could be a more general sign that customer demand for the goods in question is weakening, which calls for a more permanent price drop. It is especially useful when sales are both seasonal and unpredictable, so that the business is caught with less inventory on hand when the season is over. Companies can calculate inventory turnover. Feather Light sells memory foam mattresses for $1500 apiece. A high ratio implies strong sales or insufficient inventory to support sales at that rate. Inventory turnover is calculated by dividing the cost of goods sold by the average inventory for the same time period. Youll be able to fix these issues once you know what your ideal ratio is. Cost of goods sold, aka COGS, is the direct costs of producing goods (including raw materials) to be sold by the company. The inventory turnover formula measures the rate at which inventory is used over a measurement period. The formula is as follows: Annual cost of goods sold / Ending inventory = Inventory turnover. A slow turnover rate may indicate that a company has too much stock or weak sales numbers. In the calculation, the cost of goods sold refers to the cost of the finished goods or services delivered to customers. Alternatively, if youre always selling products at a heavily discounted price, customers may be suspicious. Another way to look at it is the number of days from when the inventory was manufactured or purchased to the date it was all sold or removed from circulation. The inventory holding period has decreased in 2021 to 25.35 days, compared to 32.85 days in 2020. Work out your average inventory value using the same method as above. The total COGS for the year was $1.5M. The volume of inventory sold can be enhanced by increasing the volume of marketing activities. tab), Global Inventory is comprised of all the goods a company currently holds in stock that will ultimately be sold. number of KPIs that can provide insights into how to increase sales or improve the marketability of certain stock or the overall inventory mix. Automation adds efficiencies and may cut costs on its own. Conversely, a low ratio indicates weak sales, lackluster market demand or an inventory glut. Their inventory turnover is 0.29, indicating that they are spending too much money on holding costs (storage costs), and items are lingering on the shelves. 365 is the most commonly used day count convention however some analysts may prefer to use 360 days. Youll find this value on your companys income statement. Then, if you have anything left over, dont toss it out. An ideal inventory turnover ratio is between 2 and 4. The average inventory balance for this year was 48413, average . Are competitors offering a lower price? Lastly, the formula can also be used to calculate how much time it will take to sell all the inventory currently on hand. Finally, to calculate turns, divide your cost of goods sold by the average inventory. Inventory Turnover Ratio = (Cost of Goods Sold)/ (Average Inventory) For example: Republican Manufacturing Co. has a cost of goods sold of $5M for the current year. It is also possible that the company has installed excellent inventory management systems; it may be using a just-in-time production system that requires minimal inventory levels, and it may be exercising tight control over its obsolete inventory. Inventory Turnover = Cost of goods sold/ Average value of the inventory, = [150,000 + 80,000 - 20,000]/ (150,000 + 20,000)/ 2 = 210,000/ 85,000, Average days to sell inventory = 365 Days/ Inventory Turnover Ratio. Its not just about the cost of the item. Inventory turnover = number of units sold / average number of units on-hand Inventory turnover = 500 / 300 Inventory turnover = 1.66 In this case, the inventory turnover ratio is a bit low. Give customers the option to request a notification when items are restocked. The result is the average number of days it takes to sell through inventory. Send notifications to your inventory management team when products need to be replenished. Therefore, it is one of the indicators of how well the company is doing in terms of sales and production. The averaging calculation can cover a relatively lengthy period of time, to reduce the impact of seasonality on the outcome. At the start of the year, the company had 500 mattresses in stock and ended with 400. But when you couple it with an order management system that facilitates reordering of inventory that sells well so that it is always in stock, you net even more wins. Are there opportunities for you to maneuver a better strategic position on competitive items when you note emerging trends in your inventory ratios? Why Is a Higher Inventory Turnover Ratio Better? Is the purchasing strategy no longer working and inventory is piling up? This can indicate that much of the inventory is obsolete or that the firm has acquired more inventory than it can sell within a reasonable period of time. The latter takes into account the fluctuations in inventory levels throughout the year. How to Calculate Inventory Turnover Determine the cost of goods sold (COGS) from your annual income statement. There will be some that come to associate your brand with bargain hunting and will only buy from you when your stock is heavily discounted. Inventory needs to be managed and must strike a balance that is neither storing too much inventory nor too little inventory. A push system, such as material requirements planning, tends to require more inventory than a pull system, such as a just-in-time system. Inventory turnover is the rate that inventory stock is sold, or used, and replaced. However, low turnover can also indicate that management has committed to the practice of fulfilling all customer orders immediately, which calls for a larger investment in inventory. How to Calculate Inventory Turnover Ratio (Step-by-Step) The inventory turnover ratio portrays the efficiency at which the inventory of a company is turned into finished goods and sold to customers. Using the first method: If a company has an annual inventory amount of $100,000 worth of goods and yearly sales of $1 million, its annual inventory turnover is 10. Impact: For continuous growth of the business company needs to sell all their finished goods as . & Operational Security, Advertising and The ratio can show us the number of times and inventory has been sold over a particular period, e.g., 12 months. It is also called a stock turnover ratio. In simple terms, inventory turnover ratio reflects how fast a company sells an item and is used to measure sales and inventory efficiency. A company can then divide the. Otherwise, distributors and retailers would have bought the goods at once, resulting in a small inventory investment by the manufacturer. That spells opportunity, if you can increase your stock of popular items. This includes raw materials and direct labor costs, like when calculating the cost of goods sold. Average inventory is typically used to even out spikes and dips from outlier changes represented in one segment of time, such as a day or month. Commerce, Analytics For example, an inventory turnover rate of four times per year approximately corresponds to 90 days that will be required for inventory to be sold off. A business needs to time the introduction of product design changes, so that all components associated with the old product design have been used up before the new design is introduced. Over Q3, its busiest period, the retailer posted $47,000 in COGS and $16,000 in average inventory. The inventory turnover ratio is measured as a financial tool that calculates how many times the business sells or uses its inventory in an accounting period. The common management perception is that inventory turnover should be extremely high, since this means that you are operating a business with a smaller cash investment in inventory. Doing so keeps the raw materials and merchandise investment lower, on average. On the other hand, your pricing may need to be adjusted. If ABC could somehow double its inventory turnover while maintaining sales at the same level, then its inventory investment would drop to $1,000,000, thereby saving it $1,000,000 of cash that it can use elsewhere. Inventory turnover is the rate at which a company's inventory is sold and then replenished. Within the mattress industry, for example, Theres a lot that goes into inventory management. With NetSuite, you go live in a predictable timeframe smart, stepped implementations begin with sales and span the entire customer lifecycle, so theres continuity from sales to services to support. Alert customers when inventory is running low. Inventory turnover refers to the number of times that a company's product inventory is sold and needs replacing, over a specific period. For example, in the case of seasonal sales, inventories of certain items like patio furniture or artificial trees are pushed abnormally high just ahead of the season and are seriously depleted at the end of it. This is an especially important issue for seasonal businesses, which do not want to be caught with too much inventory on hand once the main sales season is over. The company has invested too heavily in inventory, and could meet customer demand with fewer units on hand. If you know what your average turnover rate isand, more importantly, what it. Yet another turnover improvement approach is to have shorter production runs, which reduces the amount of finished goods inventory. Inventory Turnover Ratio = 1.90. Days' sales in inventory. Monitoring, Application The following issues can impact the amount of inventory turnover: Seasonal build. Inventory turnover is a financial ratio showing how many times a company turned over its inventory relative to its cost of goods sold (COGS) in a given period. That is a company would take 6 months to sell and replace all inventories. Inventory turns matter for several reasons. Calculate average inventory, inventory turnover ratio and average selling period for 2022. Understanding the average inventory turnover is a critical measure of business performance, cost management, and sales, is inversely proportional to days in sales inventory and can be benchmarked against other . One thing to compare them to is the industry-wide ratio. What Is the Best Inventory Turnover Ratio? In general, the higher the ratio number the better as it most often indicates strong sales. A higher ratio and fewer days to calculate the ratio is considered favorable. Management, Professional Services Evaluation of the efficiency of the company. $ And inventory management is no different. Certification, Advanced Inventory must be analyzed to identify when goods should be ordered and in what quantity. In both cases, there is a high risk of inventory aging, in which case it becomes obsolete and has little residual value. The purchasing manager may advocate purchasing in bulk to obtain volume purchase discounts. Purchasing practices. The company's cost of beginning inventory was $600,000 and the cost of ending inventory was $400,000. Conversely, the following are some of the ratio's disadvantages: This ratio just gives an average number of times the inventory company sold its inventory and does not give an exact number. It is calculated to see if a business has an excessive inventory in comparison to its sales level. Take Apples inventory, for example. 3,129 Crs . Inventory turnover ratio is an accounting ratio that establishes a relationship between the revenue cost, more commonly known as the cost of goods sold and average inventory carried during the period. At the very least, it should be turning its inventory around 6 times a year, or every 60 days or so, in order to keep pace with smaller mattress brands. To simplify, an inventory turnover is a measure of the number of times an inventory is sold or used in a time period such as a year. Are longer-than-usual delivery times scaring off customers? Thats good news for your company, right? This information can help a company decide whether to raise prices, increase its orders, diversify suppliers, feature a product prominently in its marketing or buy additional related inventory. Thats lost time and lost opportunity, too. Inventory turnover Times 22 24 25 16 5. the stock velocity is 1.90 times. The inventory turnover ratio cannot be used to predict the profitability of a business. Inventory Turnover = Cost of goods sold/ Average value of inventory, Cost of goods sold (COGS) = Beginning inventory + Purchases - Closing inventory, Average value of inventory = (Beginning inventory + closing inventory)/ 2. On the other hand, having insufficient stock might lead to production halts and unhappy clients. Inventory Turnover Ratio = Cost of goods sold / Average Inventory in the period. Therefore, the Black Sea Company with a higher ratio is considered better than the others as the higher percentage is considered favorable. That way you can get an early and important clue on whether to scale up or down on any product line or brand. It works best when setup costs are relatively low. Thus, a turnover rate of 4.0 becomes 91 days of inventory. It is a strong indicator of poor inventory control practices, such as purchasing in excessive volumes and not selling off obsolete inventory before it loses all of its value. A higher turnover ratio results from higher demand for the company's products in the market among consumers. The inventory turnover ratio is a measure of how many times the inventory is sold and replaced over a given period. Material requirements planning, or MRP, is a related process to understand inventory requirements while balancing supply and demand. Inventory turnover = cost of goods sold (COGS) / average value of inventory. One can also interpret the ratio as the time to which inventory is held. A good way to efficiently employ more frequent purchases is to set up a master purchase order for a large quantity of purchases, and then issue a release against this purchase order at frequent intervals. There are many ways to improve inventory turnover. What Should I Do About a Low Inventory Turnover Ratio? 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