August 20, 2019

How to Measure Your Stockpile Inventory Turnover Ratio

Author: Stockpile Reports

Managing your stockpile inventory levels and measuring your inventory turnover ratio is critical for operations and sales success. It allows you to show whether or not sales efforts are effective and if costs are being controlled. Determining your inventory turnover ratio will give you a clear picture of how well your company is generating sales from the inventory on the ground.

What Is Stockpile Inventory?

Stockpile inventory is the physical count of the inventory you have at your worksites including raw materials, materials that are currently in production (also called work-in-progress materials), and any finished products that are available to be sold. For example, the aggregate materials a ready mix concrete company uses in the production of their concrete would be considered inventory. Another example is colored bark mulch produced by an agricultural products company that is available to be sold.

Calculating Your Stockpile Inventory Turnover Ratio

First, Find Your Cost of Goods Sold and Average Inventory

When determining your inventory turnover ratio, you are determining how much inventory is sold over a specific period of time. To find your inventory turnover ratio, divide your cost of goods sold (COGS) by your average inventory. Alternatively, you can divide your sales by your average inventory.

• Average inventory is used in the ratio because sales often fluctuate throughout the year. For example, a landscape materials company may be busier in the summer than in the winter or vice versa depending on where they are located.
• Cost of Goods Sold (COGS) measures the costs to produce the goods you are selling – such as concrete, aggregates, etc. COGS can include the cost of materials, labor costs, overhead, and fixed costs that are directly related to the production of the product.

How Is Your Inventory Turnover Interpreted?

Inventory turnover is the number of times your company sells and replaces its inventory in a defined period of time.

• The higher the inventory turnover ratio, the better. A high ratio means that your company is selling inventory efficiently. A low ratio indicates the demand for products is weak and/or customer needs are shifting. It could also indicate that sales and production aren’t in sync.
• The inventory turnover ratio provides a clear of your company inventory management efficiency. If your company has overestimated the demand, they may wind up with too much inventory on hand. Alternatively, they may have underestimated the demand, resulting in missed sales opportunities.
• The inventory turnover can provide insight into whether your company’s departments are in sync and communicating properly. In a perfect world, inventory matches sales. The management and storage of excess inventory impacts your company’s bottom line. Therefore, the inventory turnover ratio can be a clear indicator of managing operating costs and the effectiveness of sales.

Next, Find Your Days Sales of Inventory

Days Sales of Inventory (DSI) measures how many days inventory takes to convert into sales. DSI is measured by dividing the average inventory by the cost of goods sold and multiplying the total by 365.

• A low DSI means that it takes fewer days to turn inventory into cash.
• DSI will be low If your company has the right amount of inventory on hand.
• All industries may have different DSI. For example, an aggregates plant may have a higher DSI than a ready mix concrete plant.

Do The Math

Your company reported annual sales of $6.3 million dollars, year-end inventory of $1.2 million dollars, and an annual cost of goods sold of $4.4 million.

Your inventory turnover for the year equals:

$4.4 million divided by $1.2 million = 3.67

It’s days inventory equals:

($1.2 million divided by $4.4 million) x 365 = 99.5 days

This means that your company sells all of its inventory within a 99-day period, which depending on your industry, could indicate that you have too much inventory on hand.

Operate on Just In Time Inventory

Your inventory turnover and days sales in inventory could indicate that you have too much, or not enough, inventory on hand to meet demand. Excess inventory is costly. It costs money to manage, measure, and store materials. Not enough inventory could mean that you are missing out on sales opportunities. With Just In Time inventory, you can ensure that you have the right amount of inventory on hand at all times.

If you would like to learn more about how Stockpile Reports is shaping the future of stockpile inventory management, please contact us.