Manufacturing Inventory Turnover Data

Benchmarking & Monitoring

For most manufacturers inventory is one of the top two items on the balance sheet. It often requires more capital than the facilities and equipment. Inventory is also a measure of overall efficacy since most manufacturing problems increase inventory. (See the Role of Inventory)

One metric for evaluating the amount of your inventory is Inventory Turnover. Turnover measures the efficiency of inventory usage and compensates for differences in sales volume. This metric is simple, intuitive and easy to calculate.

Calculating Turnover

This calculation uses actual sales dollars from the P&L Statement and period-end inventory value from the balance sheet. It is also know as the Sales/Inventory Ratio. There are many variations of this calculation, for example:

• The period need not be annual. Monthly or even weekly calculations may be useful.

• Average inventory value over the period is more accurate than end-of-period value especially if there is seasonality. But an accurate average value may be unavailable.

• Both sales and inventory value for the period should, ideally, use Cost of Goods (COG). However, This information may be unavailable. Moreover, manufacturers vary widely in their calculation of COG and this makes comparison between companies less accurate.

• Turnover can monitor trends or changes from previous periods. It is also useful for benchmarking against similar firms. When benchmarking with industry averages there are several cautionary notes:

  1) There are wide variations in turnover even within an industry or industry sub-group. The best firms may have turnovers that are 200%-900% of the industry average. Targeting the industry average turnover is setting up mediocrity as a goal.

  2) There MAY be special circumstances that dictate an average or below average turnover. However, such circumstances can often be overcome. When low turnover occurs, it is important to find and rectify the source of high inventory.

  Benchmark averages for major industry groups are shown below on the sample worksheet. Turnover ranges from a low of 6.2 (Leather, 316) to a high of 16.7 (Petroleum, 324). A few of the subcategories also appear in this example.  We offer a much more detailed spreadsheet with over 750 categories and sub-categories for only $8.00. Click Here to purchase. The raw data comes from the U.S. Census Bureau's 2007 Economic Census Report.