Raw Material Inventory Turnover Ratio: Formula and Example

The raw material inventory turnover ratio is raw materials used in a period divided by the average value of raw materials held: how many times the shelf of ingredients and packaging was used up and replaced. Its partner, the raw material holding period, turns that into days: 365 divided by the turnover, or how long the average dollar of raw materials sits before it's used. Raw materials used comes from opening stock plus purchases minus closing stock, all at cost. For a small maker, the total is a useful yearly number, but the ratio earns its keep item by item, because a fast-turning fruit and a slow-turning box of labels can average out to something that describes neither. In the example below, a jam line uses $19,000 of raw materials in a year against an average of $4,690 on hand: a turnover of 4.05 and a holding period of 90 days, with labels sitting 243 days and sugar 30. Below are the formulas, the example, what the slow items say, and how to raise the turnover without running short.

The short version

• Raw material turnover = raw materials used ÷ average raw materials inventory.
• Raw materials used = opening raw materials + purchases − closing raw materials.
• Average inventory = (opening + closing) ÷ 2, or the average of monthly counts.
• Holding period in days = 365 ÷ turnover.
• Work it out item by item; the total hides the slow ones.
• Slow items are often minimums, seasonal buys or bulk deals; check what they cost to hold.
• TaroStack keeps stock value by month and what each batch used, at what you paid. More below.

The formulas

Everything is at cost: what you paid for the ingredients and packaging, not what the finished product sells for. Finished goods have their own turnover; how that one is worked out is in inventory turnover example.

A year of a jam line

Windward Roots, the made-up taro business I use in these examples, also makes guava jam, about 6,000 jars a year. Raw materials at the start of the year were $4,400 and at the end $4,980; it bought $19,580 during the year:

Raw materials used      $4,400 + $19,580 − $4,980 = $19,000
Average inventory       ($4,400 + $4,980) ÷ 2 = $4,690
Turnover                $19,000 ÷ $4,690 = 4.05
Holding period          365 ÷ 4.05 = 90 days

Ninety days on average. Item by item, it looks different:

How raw materials, work in progress and finished goods are told apart is in raw materials inventory example.

What the slow items say

• Labels, 243 days. Printed in a big run for a lower price each. The question is whether the discount covered eight months of holding them, and the risk that a label change makes the rest worthless.
• Jars and lids, 122 days. Bought by the pallet. A pallet is cheaper per jar, but it's $2,000 sitting in the back room most of the year.
• Pectin, 122 days. A bulk bag. It keeps, so the cost is mainly the cash.
• Guava pulp, 61 days. Bought in season and frozen. That's a choice: the fruit isn't there all year, so a slow turnover here is the plan, not a mistake, as long as the freezer space is costed in.
• Sugar, 30 days. Bought as needed. Nothing to fix.

Whether a slow item is worth it depends on what it costs to hold; the monthly carrying cost of stock is in inventory carrying cost, and what to do with more stock than you need is in too much inventory on hand.

Raising the turnover without running short

1. Order the slow items in smaller lots, where the price difference is smaller than the holding cost.
2. Ask for split deliveries: a pallet's price, delivered in quarters.
3. Set reorder points from real use, so nothing is reordered early.
4. Leave the seasonal ones alone when the season sets the buying, and cost the storage instead.
5. Watch it monthly by item, not once a year in total.

Where this stops working

The formula needs three numbers per item: opening stock, purchases and closing stock, all at cost. In a spreadsheet, that means two counts and a year of invoices per item, and the answer arrives once a year, long after the labels were ordered.

How TaroStack does it

TaroStack keeps the numbers the ratio is made of, item by item, every month.

What was used, at what you paid. Recording a batch takes ingredients and packaging off stock from the lots used, at what you paid for each, with FIFO cost layers, freight and other landed costs included, so the batches are a record of what was used and what it cost.

What's on hand, by month. Stock value is shown by site and month, and TaroStack lists stock that isn't moving, with how long since it last went out, so the labels sitting for months are visible without a formula.

And reordering in days of cover. The reorder list works in days of cover at the rate stock really moves, and reorder points can be suggested from that movement, so slow items are reordered later and in the amounts you use.

Batches, true cost, stock value, slow-moving stock and the reorder list are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

What is the formula for raw material inventory turnover?

Raw materials used divided by average raw materials inventory, both at cost. Raw materials used is opening raw materials plus purchases minus closing raw materials.

How do you calculate the raw material holding period?

Divide 365 by the raw material turnover. A turnover of 4.05 is a holding period of about 90 days.

What is a good raw material turnover ratio?

It depends on the item. Ingredients bought as needed turn many times a year; seasonal fruit or packaging bought in big runs turns slowly by design. Compare each item with its own past and with what it costs to hold.

Why work out turnover by item?

Because the total averages fast and slow items together. In the example, a total of 90 days hides labels at 243 days and sugar at 30.