Inventory Control Ratios

For reasons of monitoring the effectiveness of inventory management this is useful to look at the subsequent ratios and indexes:

Overall Inventory Turnover Ratio = Cost of goods sold/Average total inventories at cost

Raw Material Inventory Turnover Ratio

= Annual consumption of raw material/Average raw material inventory

Work-in-process Inventory Turnover Ratio

= Cost of manufacture/ Average work in process inventory at cost

Finished Goods Inventory Turnover ratio  

= Cost of goods sold/ Average inventory of finished goods at cost

 Average Age of Raw Materials in Inventory

= Average Raw Material Inventory at cost/ Average Daily Purchase of Raw Materials

Average Age of Finished Goods Inventory

= Average finished goods inventory at Cost/Average cost of goods manufactured per day

Out-of-stock index = Number of times out of stock/Number of times requisitioned

Spare Parts Index

= Value of Spare Parts Inventory Two Bin System/Value of Capital Equipment

In this system all inventory items are stored in two divides bins as two bins for each kind of inventory items. In the first bin an adequate supply of inventory is stored that is aimed to used over a designated period of time. In the next bin a safety stock is kept that is going to be used throughout lead times. As soon as material in the first bin is consumed a demand for additional stock is placed and in the meantime inventory from the second bin is utilized. On receipt of new demand, second bin is restored and the balance is place in the first bin. In such system depletion of inventory in the initial bin automatically produces a signal to re-order that specific inventory.