Your retail or e-commerce business might be successful right now.
But without proper inventory management, you risk running out of stock and missing potential customers in the process.
On the other hand, if you start using the proper KPIs to measure your inventory efficiency, you can make sure that you’ll always provide the best shopping service to your new customers and miss zero opportunities!
But you already know this. And you want to see what types of inventory management KPIs can get the job done, so you don’t have to worry about guessing how to manage your business anymore.
That’s exactly what this post is going to cover, but first:
How do you define KPIs in Inventory Management?
KPIs stand for Key Performance Indicators and are often used to measure and monitor performance over time for a specific objective. In Inventory Management, KPIs are metrics that help you better understand and make more informed decisions when it comes to your stock. They provide you with valuable information and insights regarding sales, costs, process success, and much more.
Understanding your inventory KPIs is crucial to assessing your processes, making needed changes, and improving your overall inventory management efficiency.
The Importance of Efficient Inventory Management
Unless you want to start an online store with no stock, inventory management is essential for many reasons.
First off, you want to ensure you have enough supply for your order demand. And on the other hand, you want to avoid stocking too many products so your storage costs won’t drain your budget.
When it comes to efficient inventory management, there are many goals to look after:
- Predict your demand successfully to balance your supply,
- Reduce storage costs as much as possible,
- Optimize your inventory layout,
- Manage returns successfully.
Incorporating the right inventory KPIs into your business will help you reach these goals more quickly. For this, you can use a Business Intelligence tool like ClicData to keep all your metrics in a single dashboard.
Inventory KPIs you must track
Now let’s dig deeper into which are the best inventory management KPIs to track to optimize your business. We’ve devided them into 2 main categories to better assess your inventory management process:
- Sales Inventory KPIs
- Receiving KPIs
- Operational Inventory KPIs
Sales Inventory KPIs
These inventory management KPIs are closely related to your sales and the demand for your inventory.
In general, sales KPIs will help you measure how efficiently you’re supplying products to your customers with the purpose of never running out of stock.
The better these inventory KPIs, the better your customer satisfaction will be, and the more you’ll be able to retain them.
1. Inventory Turnover Ratio
The Inventory Turnover Ratio is a popular KPI that measures how well you’re selling your stock and supplying it.
It is a derived metric that’s measured by dividing two important metrics:
- Cost of goods sold (COGS): the total production cost of all the products you’ve managed to sell in a specific time period.
- Average Inventory Value: the cost of storing products during a specific time period.
Here’s the formula to calculate this inventory KPI:
Inventory Turnover Ratio = COGS ÷ Average Inventory Value
The higher your inventory turnover, the better. An excellent turnover ratio will indicate that your sales team is doing a good job selling your products. And your inventory is successfully replacing the stock without running over too many warehousing costs.
Pro tip: You can use inventory management software (IMS) to optimize your inventory metrics and improve your returns.
2. Average days to sell inventory (DSI)
Average days in inventory or “DSI” measure how many days it takes to sell a product in the inventory.
Calculating this metric involves calculating the inverse of your inventory turnover ratio and multiplying it by 365. The formula would be:
Days to Sell Inventory = [Average Inventory Value ÷ Cost of Goods Sold (COGS)] x 365
The fewer days it takes to sell a product, the better. As it means you’ll pay less for storage and that you’re not over-supplying your inventory.
If it takes too many days to sell. It means there’s an inefficient movement of stock and that your sales are running poorly.
Alternatively, you can calculate “Weeks on Hand” to measure the same metric in a different time period—in this case, weeks.
For this, you’d have to multiply the same factor for 52 instead of 365:
Weeks on Hand = [Average Inventory Value ÷ Cost of Goods Sold (COGS)] x 52
This metric will measure how many weeks it takes to sell your products. And the lower the result, the better.
Whether you measure this in days or weeks will depend on the type of product you’re selling. If it’s a low-cost product with higher demand and stock, you’d be better off calculating this in days rather than weeks, and so on.
3. Sell-Through Ratio
The Sell-Through Ratio measures the percentage of your overall stock that’s being sold.
A low sell-through ratio means you’re not selling much of your products and have too much stock. In contrast, a 100% result means that your inventory is successfully supplying the demand (probably because of shortage or delayed shipping).
What you need for calculating this metric is a fairly simple output/input formula:
Sell-through rate = (Number of units sold ÷ Number of units received) x 100
You want a reasonably high percentage (like 80%) to reduce as many storage costs as possible without getting too close to the 90% zone.
A percentage that’s lower than 50% can be concerning as it means you could either be selling more or that you’re oversupplying your inventory.
4. Accuracy of Forecast Demand
This inventory metric measures how accurately you predicted the demand.
To calculate it, you must use a simple margin of error formula to compare the forecasted demand with the actual demand. Here’s how it looks:
Accuracy of Forecast Demand = [(real demand – predicted demand) ÷ real demand] x 100
The lower the percentage, the closer the forecast was.
An accurate demand prediction will help you prepare your stock for incoming demand spikes and avoid getting out of stock too soon. Or determine when the wave is going to end and prevent oversupplying your inventory.
5. Rate of return
Rate of Return is one of the handiest inventory KPI to control your returns.
The rate of return will let you know how many of your products sold are returned to you by customers. So you can expect it and prepare for the returned stock.
You want to reduce this percentage to the minimum, as too many returns mean that you’re not delivering a high-quality service to your customers. And thus risking going out of business.
Its calculation is a simple percentage of products sold that are returned. It looks like this:
Rate of Return = (Number of products returned ÷ Number of products sold) x 100
It’s advisable to calculate this metric per reason of return. So you can compare them and spot what problems are driving the most returns.
6. Gross Margin by Product
Your gross margin shows the percentage of profit you get for the products you sell.
The higher the margin, the more returns you get from investing in your manufacturing process. And from your business, in general.
Here’s how you calculate it:
Product Gross Margin = [(Net Sales – Cost of Goods Sold or COGS) ÷ Net Sales] x 100
A low margin means you’re not getting much profit from your products. While on the other hand, a high margin can be too expensive for your market if they’re not willing to pay high prices.
It’s hard to determine what a good margin is as it will depend on the role the product has on your business, the type of product, and the market for the product.
7. Gross Margin Return on Investment (GMROI)
The GMROI is a standard metric for measuring how well your inventory management is doing financially.
It will indicate the returns in sales you got from investing in your inventory. And calculating it is as simple as dividing your Gross Margin by your average inventory costs.
GMROI = Gross Margin ÷ Average Inventory Costs
If your Gross Margin is very good, but your GMROI is low. It would mean that either your inventory costs were too high or that your prices were too high, and thus you couldn’t sell enough products.
This inventory KPI is a direct financial correlation with your inventory management efficiency. So keep aiming as high as possible.
These inventory management KPIs focus on how you supply your inventory and manage the receiving orders.
Receiving KPIs will help you understand if you’re receiving stock efficiently and give you an idea of how to improve your process.
8. Receiving efficiency
This metric measures the efficiency of your employees when transporting received stock into your inventory.
The higher this metric, the more efficient is your receiving process. And if it’s too low, there might be areas of improvement in your procedures.
Here’s how it’s calculated:
Receiving Efficiency = Volume of Inventory Received ÷ Man-Hours
For example, if you only have one employee receiving stock and they work 40 hours per week. Then you only need to divide the number of products received by 40 to measure this metric.
9. Time to Receive
Time to Receive tracks how long it takes for stock to get successfully received. From the time it takes to get validated, to the moment it becomes ready to get ordered.
To calculate it, you need to sum the duration of every receiving procedure:
Time to Receive = Time for stock validation + Time to add stock to database + Time to package the package for storage
If you have more processes, you need to add them too. You can also measure the whole process with a clock instead of each task separately.
In the end, you want this metric to be as low as possible, as an inefficient receiving process might cause bottlenecks in your inventory management.
10. Put away time
As the name suggests, this inventory management KPI measures the time it takes to put away the stock in its respective rack for a more straightforward pickup.
This metric is only measured, not calculated. It indicates the whole time it takes to complete the put-away process.
Put Away Time = Total time to make received stock ready for pickup
The lower the time you spend in this process, the better. So if you spot any unnecessary process that’s taking too much time, it might be worth eliminating it.
Operational Inventory KPIs
These inventory metrics measure the operational costs of your inventory process and how efficiently you’re running your business.
For a brick-and-mortar business, you can leverage business intelligence to transform massive amounts of data into actionable insights that will massively improve your inventory efficiency.
And with these operational KPIs, you can measure it.
11. Perfect order rate
A perfect order is an order that was completed without any issues, return, or delay. The perfect order rate will measure the percentage of your orders that were successfully delivered.
You want the highest percentage possible. A high ratio means that your delivery process is excellent and that you satisfy your customers consistently.
Here’s how you calculate it:
Perfect Order Rate = [(Orders delivered on time + completed orders + damage-free orders + orders with accurate documentation) ÷ Number of Orders] x 100
You can either sum all the successful orders and divide them by the total number of orders. Or subtract the number of unsuccessful orders to the total, like this:
Perfect Order Rate = [(Number of Orders – Unsuccessful Orders) ÷ Number of Orders] x 100
As a benchmark, most organizations have a perfect order index of 90 percent, according to APQC’s data.
If you don’t hit that number, you should work on optimizing delivery routes using planning solutions, such as route optimization software.
12. Inventory carrying cost
Inventory carrying cost is the percentage of your total inventory value that goes into storing and managing your stock. This cost might include many elements like depreciation, salaries, taxes, transportation, and so on.
Despite involving a lot of elements. The calculation is pretty simple:
Inventory Carrying Cost = [(Warehousing costs + Transportation costs + Inventory risk costs + Depreciation + Salaries + Taxes + … + etc) ÷ Total Inventory Value] x 100
Expected carrying costs go between 20-30%. Varies a lot depending on the size of your business.
13. Fill rate
The fill rate indicates how well you’re able to fulfill the demand. It is the percentage of orders that are immediately available at the time of ordering.
If you’re not able to fulfill the demand, this percentage will go down. And it will mean that you’re failing to meet customers’ needs and expectations.
The calculation is pretty simple:
Fill Rate = Number of products provided ÷ Number of products ordered
Use this inventory KPI to measure how effective your operations are and optimize them for better customer satisfaction.
14. Customer Satisfaction Score
Your customer satisfaction is critical for business success. There’s no doubt about that.
But when it comes to measuring it, it might be trickier. A common practice is to ask customers to review your service or to fill out a survey. And based on their responses, you can calculate a customer satisfaction score (or CSAT) to ensure that you’re providing an excellent service.
Here’s the simple formula:
CSAT = (Number of positive feedbacks ÷ Total number of feedbacks) x 100
15. Lead time
Lead time is the total time it takes to fulfill an order from when it gets purchased until the products arrive successfully.
Like other similar metrics, you want to aim for a lower lead time—not only for efficiency but also to improve customer satisfaction.
For this, you must measure the whole process or sum its parts:
Lead Time = Order processing + Pickup time + Delivery time
You should include every procedure in your delivery process and sum them up, or you’ll get an inaccurate number. The main benefit of measuring each task is that you’ll be able to spot bottlenecks and solve them quickly.
The Stock-out metric is a direct measurement of your ability to replenish your inventory. It indicates the percentage of items that are not available when there’s an order.
For calculating it, you need to measure the number of orders that you didn’t fulfill due to running out of stock and divide it by your total number of orders:
Stock-out = Number of out-of-stock orders ÷ Total number of orders
You can solve high stock-out numbers by optimizing your stock replenishment, receiving time, and putting away time—as well as making accurate demand predictions, so the order waves don’t catch you off-guard.
Dead stocks are goods that are no longer optimal for sale after a time period. For example, perished fruits.
Your dead stock rate will indicate the percentage of stock that expires and can no longer be sold to customers. It’s easily calculated with this formula:
Dead Stock = (Amount of monthly expired stock ÷ Amount of monthly available stock) x 100
This metric is a direct correlation with your business viability. A high dead stock rate means that you’re unable to sell it and that you’ll need to account for the costs of dealing with the wasted costs of storage and managing expired goods.
So if you’re selling perishable products, you must put extra effort into minimizing this number as much as possible.
Optimize Your Inventory Management
You can’t control what you don’t measure.
KPIs are essential for achieving goals in almost every part of your business—including your inventory management.
There are far more metrics than the ones covered in this post. However, these inventory management KPIs cover the essential components of your business, such as sales, receipt, and operations.
So if you need to get started on optimizing your inventory management, these are by far the ones you want to begin with.
Fortunately, you can use business intelligence software like ClicData to track all your metrics for you in one simple dashboard.
The best time to get started is now.
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About the author
Zoe is a content marketing strategist for SaaS brands like FollowUpBoss, Mention.com, and more. Bylines: Ecwid, ProProfs, Score, etc. On the personal front, Zoe is a pho enthusiast and loves traveling around the world as a digital nomad.