The formula for calculating inventory turnover isĬost of Goods Sold / Average Inventory = Inventory Turnover This is important to track because you need to have enough product on hand to meet demand, but you don’t want so much inventory that all of your money is tied up in a product that might not sell. Inventory turnover is the speed with which you sell and replace all of your inventory. For instance, you might respond differently to the return of a defective product than to one that was incorrectly delivered.Ĭlick here to read more about how to keep your products flowing smoothly in and out of your warehouse. The RoR can be calculated for subcategories of your product so you can begin to understand not only what is returned but why. Products Returned / Total Products Delivered = Rate of Return The Rate of Return (RoR) is the metric that helps you understand how many products you deliver are returned. Understanding why products are returned can help you solve issues early. Returned products cost time and money to process. The higher the percentage, the smaller the profit margins and greater the chance of a fiscal burden. You’ll want to keep the carrying cost percentage as low as possible. Inventory Holding Sum = Inventory Service Cost + Inventory Risk Cost + Capital Cost + Storage Cost The formula to calculate the holding sum is as follows: Here, inventory holding sum comprises four components of carrying cost. How to calculate carrying cost percentage:Ĭarrying Cost (%) = Inventory Holding Sum / Total Value of Inventory x 100 While there are many classifications of inventory costs, such as receiving cost, storage cost, and packing cost, carrying cost is important because it tells you how much it costs to keep your inventory at desired levels. The inventory carrying cost refers to the total cost required to maintain inventory over a given period of time. This blog discusses some of these metrics and how they can be calculated. To optimize your warehouse operations, we’ve standardized some key metrics that managers around the world use to understand their inventory. They involve a great deal of calculated decision-making on the part of the warehouse manager, and handled well, they contribute to an organized warehouse operation. Warehouse and inventory management are two of the most important aspects of running a product-based business.
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