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![]() ![]() ![]() But generally, a higher number is better. It varies by industry - for example, a restaurant chain will have a much higher inventory turnover ratio than a specialty furniture or jewelry retailer. A high ratio is not a perfect scenario if a company is at risk of failing to meet a sudden surge in demand. A low ratio can hurt the bottom line through (1) higher inventory and storage costs, (2) depreciation, (3) increased risk of theft or damage and (4) less protection against market price fluctuations. ![]() Turnover ratio reflects a company’s ability to flow inventory through its supply chain. It's more in line with a just-in-time way of operating.” You can order in smaller batches, and you don't need as much capital outlay, financial outlay or warehousing. “The higher the number, the more efficient you are. “You are looking at how much inventory is coming in, how quickly you're using it and how quickly you're bringing more back in,” Fleming says. The ratio can be used to determine the average time it takes for inventory to be replenished 365 divided by four equates to stock being sold and replaced every 91.25 days. If a company’s annual cost of goods sold is US$1.2 million and its average annual inventory is $300,000, its inventory turnover ratio is 4.0. The ratio - determined by dividing annual cost of goods sold by average annual inventory - indicates how many times a company’s inventory is sold and replaced during an interval, usually within a fiscal year. This month, we’ll focus on such an indicator: inventory turnover ratio.Ĭalculated by finding a simple quotient, inventory turnover ratio measures how frequently a company transfers a product from warehouse to consumer. In some cases, finding a new indicator can mean simply taking a fresh look at a tried-and-true metric that has gained new importance in the e-commerce era. If one of your key indicators becomes good enough, you probably need to find another indicator.” I was held accountable on the other metrics, such as availability, quality and actual cost. Even among my peers, PPV was important when we first started years ago, but don't remember any of us getting asked about it in my last three years on the job. “It's one of those indicators where the more efficient you are, the less it catches your attention. ![]() “We had such a high degree of PPV, I no longer had a need to look at it,” Fleming says. Fleming, a supply chain manager at Intel Corporation from 2007-14, says PPV almost became an obsolete measurement in the age of automation, where systems manage many of the inefficiencies. In the 2014 INSIDE Metrics survey, most respondents said PPV was the most important metric to their CEO/CFO however, that was not the case among “cutting-edge organizations” - those that have embraced advanced analytics. How do you use data in a way that shows supply management meeting the goals for your stakeholders?”Īn example is perhaps the most frequently-used supply management metric: purchase price variance (PPV). “That's one of the challenges when you get an ERP system and extract all that data. “We don't always know how to align metrics to stakeholder goals,” Fleming says. That sentiment, affirmed by other studies, is manifested in practitioners not knowing which metrics to use, says Jim Fleming, CPSM, CPSD, Program Manager, Certifications at ISM. Published in the INSIDE Metrics digital supplement in August 2014, the article details a survey of supply management leaders on the metrics they use - and the level of value attained from them.Ī takeaway from the survey: Supply management practitioners are not sure how to use metrics to increase - and show - procurement’s value to an organization. This month’s installment of The Monthly Metric coincides with the latest offering from the #ISMMagContentCafe: “ Supply Chain and Procurement Key Financial Performance Metrics,” by Paul Lee, Research & Analytics Director at Institute for Supply Management ® (ISM ®). ![]()
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