Maintaining your inventory at optimal levels is a tricky balance. You need enough items in stock to meet customer demand, but you don’t want excess inventory sitting around and impacting your storage costs. By tracking inventory management key performance indicators (KPIs), you can get a better idea of your average inventory and improve your ability to deliver products on time without having a large backstock.
How Inventory Management KPIs Impact Supply Chain Efficiency
Inventory management KPIs give you the information you need to see how you are ordering, managing, and turning stock. Knowing these metrics gives you the insights you need to identify weak spots in your supply chain and improve them to enhance service delivery.
Tracking inventory management KPIs helps you operate your business more effectively. You can use this information to reduce rates of dead stock and unsold inventory. By improving your supply chain performance, you may be able to save money and boost your bottom line.
Key Inventory Management KPIs for Effective Monitoring
Knowing which metrics to track will help you make informed decisions about inventory management. The data you gather through this process can also help you set strategic goals to meet customer demand and maintain optimal inventory levels. Start improving your inventory management processes by tracking these metrics.
1. Inventory Turnover Ratio
The inventory turnover ratio refers to how often you sell and replace your stock over a certain time period. You can track this number seasonally or annually, depending on what makes sense in your industry. The inventory turnover ratio gives you an idea of how well you are selling the items in stock. You may also track your sell-through rate, which is the percentage of inventory you sell relative to how much you received during the same time period.
When you’ve started tracking your inventory turnover rate, you will get a better sense of which product lines sell out quickly and which tend to accumulate into unsold inventory. Using these metrics will allow you to keep the right volume of inventory without having to pay excessive storage costs to house goods you may have trouble selling.
You can calculate your inventory turnover ratio using this formula:
Cost of goods sold/Average Inventory
This KPI is related to your stock to sales ratio, which refers to the average inventory value to the average sales value. When inventory turnover is consistent, you likely won’t have to put items on sale. Plus, you can determine how well you are meeting customer demand.
2. Stockout Rate
Your stockout rate refers to the percentage of inventory that wasn’t available for a sale. There are plenty of reasons why you might not have an item in stock, and not all of them are predictable. For example, early in the COVID-19 pandemic, retailers across the country had a hard time keeping household paper goods in stock because of an unusually high demand.
Additionally, you might be a new business experiencing a shortage of working capital. In this case, you might not have cash flow on hand to replenish your inventory promptly.
Inaccurate demand forecasting can also cause a higher stockout rate. If you don’t have a clear picture of the customer demand for certain product lines, you might not order enough stock to keep it on hand when someone wants to buy it. Stockouts happen, but you want to minimize them to cut your operating costs.
Use this formula to calculate your stockout cost:
(Number of Days Out of Stock x Average Units Sold Per Day x Profit Per Unit)
3. Order Fill Rate
Order fill rate is the percentage of orders you fulfill successfully with available stock. This supply chain metric will help you assess your inventory accuracy.
If you measure your order fill rate over time and notice it dropping, it could be a clue that you need to analyze your inventory management system. This will help you get a better sense of what your customers want to buy.
A low order fill rate can impact your business since customers can't buy the items they need. As such, you may end up driving business to your competitors. Knowing your order fill rates helps you make data-driven decisions on inventory management. This way, you’re more likely to have products on hand when your customers want them.
4. Holding Cost of Inventory
Conversely, ordering too much of a product costs you money since you must store it. This also includes the price of damaged goods since you can’t sell them. You may also have to pay employees to manage or dispose of your unsold inventory.
Holding costs also include dead stock, which refers to items that are unlikely to sell. Dead stock may be obsolete, expired, or out of season. Because buyers are fickle in nature, you probably won’t be able to completely eliminate dead stock, but you can reduce its likelihood with strong demand forecasting.
5. Lead Time
Lead time refers to the period between when you place a purchase order and when you receive your inventory at the warehouse. This is not to be confused with cycle time, which refers to the length of time it takes to fill an order after a customer places it.
Shorter lead times allow you to be more flexible with your inventory management. If you’re working with suppliers whose lead times are consistently long, you have to store more products in your warehouse. In this case, you run the risk of having unsold merchandise.
Measuring this KPI will help you identify whether you need to change suppliers. You can also determine where your inventory management processes could be improved to make purchase orders more efficient.
Gain Greater Insight into Your Supply Chain Management
If you’re ready to improve your supply chain performance, get ready to measure data.
Sugere’s cloud-based production control and asset management tools offer the insights you need to improve your workflows and optimize your inventory management. With this data, you can make informed decisions about your inventory, helping you meet customers’ needs more effectively without having excessive inventory on hand.
Learn more about how we can help you.