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August 20, 2019
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.
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.
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.
Inventory turnover is the number of times your company sells and replaces its inventory in a defined period of time.
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.
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.
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.
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