When you go to transaction MC44 you will see the below screen:

Transaction MC44 - Inventory Turnover

Like I said, most settings are easy to understand since they mostly concern filters on organisational unit (Sales Organisation, Purchasing Organisation, etc.) or filters on materials (material group, material type, etc). Of specifc importance is the setting “Daily usage” in the section Analysis period.

Daily usage unchecked: the report will use consumption quantitiesper period as registered in the material master. This means that if you use period Month for a material you can not analyze in shorter period intervals than Month. This should be no issue since Inventory Turover should be calculated over longer periods of time (minimum 6 – 12 months).

Daily usage checked: instead of the consumption values in the previous option the daily consumption values are used as you see them in report MB51 – Material Documents. I recommend this setting if you want to analyze the calculation of SAP  and to find out what movement type are included. The runtime of the report is increased.

So what movement types are included? You can find the included movement types in the movement type configuration in MBJJ. Here you can toggle the consumption parameter. This is a fundamental setting that also influences forecasting. Forecasting will use consumption values of a material. When you decide you do want to use goods issue to production order for forecasting, but not for calculation of inventory turnover, you have a problem. This cannot be done. You should calculate either value manually.

Conclusion: calculate Inventory Turnover over a longer period of time 6 to 12 months. Daily values are not relevant, unless you want to analyze results for your understanding.

Related posts:

1. MC44 – Inventory Turnover (1)
2. Dead stock report – MC50
3. Stock in previous periods: MC.9

Formula

Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory at value

If you are not familiar with the term Cost of Goods Sold, this is the cost of your revenues.

Average Inventory is measured in value and not in volume.

If you divide both elements you know how often you sold you’re average inventory.  “So what?” you ask. I will explain next.

Concept and use

I will present you with two business scenario’s to point out the significance of the Inventory Turnover ratio.

Scenario 1

You sell one product. You invest 10.000 EUR as starting stock. You run your business for one year and at then end of the year you are completely sold out. Your revenue accumulates to 12.500 EUR.  For simplicity sake your gross profit is 2.500 EUR (12.500 – 10.000).

Revenue = 12.500

COGS = 10.000

Average Inventory = 5.000 (10.000 starting stock + 0 end stock / 2 = 5.000 average stock)

Inventory Turnover = 2 (10.000 / 5.000)

ROI = 50% > 2.500 (R-C) earned out of 5.000 (A)

Scenario 2

Again you sell one product. But this time you invest 5.000 EUR in starting stock. After 6 months you sold your stock and you replenish your stock again for 5.000 EUR. After another 6 months you’re sold out. Your revenue is again 12.500 EUR. Your gross profit is 2.500 EUR (12.500 – 5000 – 5000).

Revenue = 12.500

COGS = 10.000

Average Inventory = 2.500 (5.000 starting stock + 0 end stock / 2 = 2.500 average stock)

Inventory Turnover = 4 (10.000 / 2.500)

ROI = 100% > 2.500 (R-C) earned out of 2.500 (A)

Conclusion

Looking at the two scenarios the increased inventory turnover means increased operating efficiency: your ROI increased from 50% to 100%! Obviously you invested half the money in scenario 2 to achieve the same profits.

This doesn’t mean businesses should try to achieve a maximum inventory turnover per se. Achievable ratios differ per material type (finished goods, semi or raw), but also per moving speed (ABC class). Last but not least the type of industry very much determines what ratio you can achieve: process industries typically have higher inventory turns than, say, heavy equipment manufacturers.

You can find out what the industry standards are by purchasing metrics from data suppliers like Reuters or Gartner. This will give you an idea how well you are doing compared to your competitors. Or you can just use inventory turnover as an internal benchmark. In this case you periodically review the inventory turnover for different sets of materials and set targets that you wish to achieve.

Inventory turnover is typically a financial measurement (see relation to ROI). In order to improve the ratio, close cooperation with procurement/production planning is required, since they directly influence the stock levels.

Again, as with many KPIs and reports don’t judge based on this value alone, but use other stock controlling reports to minimize your inventory and still have a sound service level.

Finally you can read an interesting business case on how inventory turns made Dell a leader in it’s business.

Related posts:

1. MC44 – Inventory Turnover (2)
2. Inventory Information System
3. Stock in previous periods: MC.9

MD05 will show only the situation as it was since the last MRP run. This transaction is suitable for reviewing the MRP run. Without taking into account new stock issues or receipts MD05 is ideal for evaluating your MRP parameters. Look at the stock date, this is the date of the last MRP run.

MD04 will show you the current stock situation taking into account all requirements and planned receipts. The stock date is always current (=today). This view is appropriate if you make procurement decisions in dynamic environments, i.e. requirement situation changed a lot since the last MRP run.

Example: MRP has run for a material on Monday early morning. The planner will not evaluate the procurement proposals until Monday afternoon. Customer service entered a large number of sales orders in the system, and the warehouse already shipped quantities. In this case I suggest the planner uses MD04 to get the most up-to-date planning situation. On top of that I would actually recommend the planner gets out of bed early and does the planning evaluation first thing in the morning. If a planner allows a lot of changes to happen, the procurement proposal out of MRP may not make sense anymore.

I will post an article on the workings of SAP MRP and the theory of MRP in the future.

Related posts:

1. MRP processing keys
2. MD04 – Export planning to Excel
3. Replenishment to Maximum Stock Level

A classic way of teaching Supply Chain inefficiencies and how to avoid them is the Beer Game. In the Beer Game participants play an actor in a four stage supply chain (from raw material provider to retailer). Each participant’s aim is to fulfill incoming orders by making sure sufficient stock is available for supply. This usually leads to creating the bullwhip effect (small demand variations downstream lead to amplified variations upstream). This is a great way of letting users (but also consultants with more technical background) experience motions in the supply chain.

For detailed instructions on how to play, a primary source is The Beer Game Portal.

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