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)
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.
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
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.
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- NAIC Codes 31-33
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The proportions of inventory in Raw Materials, work-In-Process (WIP) and finished Goods can indicate problems to be addressed in various areas.
Higher than normal proportions in Raw Materials indicates supply chain opportunities. Causes may include long lead times, transportation, quantity discounts, supplier selection, poor scheduling or poor inventory accuracy.
Higher than normal proportions in WIP indicates problems on the manufacturing floor. Examples of causes might be poor workflow, functional layouts, scheduling or quality problems.
Abnormally high Finished Goods inventories can indicate a disconnect between manufacturing output and customer's needs. Causes of the disconnect might be batching, long setups, long throughput times or erratic demand.
The chart below shows how inventory is distributed, on average, within major industry groups. More detailed information on 4, 5 and 6 digit industry groups is available in the spreadsheet.
Sales per Employee is one of many metrics for benchmarking
productivity. When comparing across firms, even within the same industry group, most
productivity measures are very approximate and sales-per-employee is no exception.
This particular study focused on inventory rather than productivity. However, we have
included this particular metric in our database because it was convenient and may be useful to