Inventory turnover is the rate at which an operation or business turns over or sells finish goods. It is an indicator of the efficiency of the production planning process and sales/marketing management. This is an important metric and should be regularly evaluated, as depending on the industry and finish goods, inventory holding costs can be a substantial portion of operating/inventory costs and are a drain on cash flow.
The inventory turnover can be calculated as:
Cost of goods sold (COGS)
Inventory turnover= -------------------------------
Inventory turnover levels that are high usually indicate a well managed productive system that operates Just in time or as a pull system with low stock spoilage levels, quicker lead times, stronger profits and cash flows, and in a manufacturing business most likely a high capacity utilization rate.
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