What is a KPI in Inventory Management?

Key performance indicators in inventory management refer to metrics that can help your business track and make more informed decisions about inventory management, control, and more. Furthermore, KPIs in inventory management is crucial for businesses because they reveal valuable insights into your sales, turnover, demand, costs, production process, consumer behavior, and more.

Nowadays, companies use inventory management systems to keep track of their KPIs since KPIs are a crucial aspect of the inventory management process and can shed light on how you are progressing, in which aspect you need to put more effort and in which opportunities you can capitalize.

Understanding 18 Critical Inventory KPIs and Metrics

How Do You Assess Inventory Management?

Businesses use different metrics to assess inventory management for varying operations. Furthermore, companies can emphasize on aspects needing improvement and change by grouping KPIs by type of operations. Eventually, inventory KPIs enable firms to identify gaps, discover problem areas, incorporate workflow adjustments, and monitor their progress.

You can classify KPIs into the following categories:

  • Sales KPIs
  • Receiving KPIs
  • Operational KPIs
Understanding 18 Critical Inventory KPIs and Metrics

How to Choose Inventory Management KPIs?

You should remember the acronym ‘SMART’ while choosing the ideal KPIs in inventory management for your business. SMART KPIs are specific, measurable, achievable, relevant, and timely. Furthermore, you should only consider KPIs that push your business forward toward its goals in the long run.

Another factor you should consider for developing KPIs in inventory management is targeting them separately to particular business units. Often, when you implement new measures, your staff can feel overwhelmed.

Furthermore, you should also consider only a few KPIs per area to begin with.

Lastly, you should closely work with your department managers to get clear answers to the following questions:

  • How might tasks change with the implementation of particular KPIs?
  • Whether the chosen metrics or KPIs will increase effectiveness and not just efficiency
  • How can your staff learn from the insights you have gained from the metrics?
  • How could KPIs affect the competition and collaboration of your staff with other departments?
  • Do the KPIs align with your business’s goals, missions, and objectives?
  • Whether the metric measures areas you want more insights to improve on
  • Whether the metrics or KPIs apply to areas that require real change and improvement
  • Whether the KPIs or metrics you have chosen for your business are dynamic
  • How can you choose better KPIs in the future?
Understanding 18 Critical Inventory KPIs and Metrics

Inventory Metrics: Sales KPIs

Sales metrics can help your sales team gain better deals and collaboration opportunities, levelling up in the e-commerce industry. Furthermore, you can configure these sales KPIs combined with your business goals and optimize the metric to measure the performance of your sales team.

Inventory turnover rate

A company’s inventory turnover ratio represents how often its stock is sold and replaced over a given period, usually a year. Furthermore, the inventory turnover rate can help you identify whether your business holds excess inventory in comparison to its sales.

Inventory turnover rate = cost of goods sold / average inventory

Days on hand (DOH)

It is also referred to as average age of inventory or average days to sell inventory (DSI). The below formula will help you calculate DOH:

Days of inventory on hand (DOH) = (average inventory for period/cost of sales for a period) x 365

Weeks on hand

The metric defines the average amount of time your inventory sells per week. Furthermore, a high week-on-hand rate indicates an inefficient inventory movement. However, a lower week-on-hand rate indicates an effective movement of stock.

You can calculate the weeks on hand with the given formula:

Weeks on hand = 52 x (average inventory for period/cost of sales for a period)

Stock to sales ratio

The stock to sales ratio indicates the total inventory amount you currently have in storage compared to the amount of sales. This metric can adjust your inventory levels and maintain higher margins.

Follow this formula to obtain the stock-to-sales ratio:
Stock to sales ratio = value of inventory/value of sales

Sell-through rate

You use the sell-through rate to compare the amount of inventory you have sold with the amount of inventory received from the manufacturer.

Here’s the formula you can apply to obtain the sell-through rate:
Sell-through rate = (No. of units sold / no. of units received) x 100

Backorder rate

It measures the number of orders your company fails to fulfill and the efficiency with which a business stocks up on high-demand products.

Here’s the formula for calculating the backorder rate:

Backorder Rate = (No. of delayed orders due to backorders/total no. of orders placed) x 100

Rate of return

You can also refer to the rate of return (ROR) as return on investment (ROI). The rate demonstrates how much profit you have earned on an investment in a given period.

You can calculate the return on investment with this formula:

Rate of return (ROR) = [(final value – initial value) / initial value] x 100

Understanding 18 Critical Inventory KPIs and Metrics

Receiving KPIs

Receiving KPIs are also referred to as warehouse KPIs. Furthermore, receiving KPIs might coincide with KPIs under operational inventory, particularly in storage. As the name suggests, receiving KPIs are particularly associated with the workflow of bringing in, receiving, and directly dealing with inventory.

Time to receive

This metric reveals the rate at which your staff prepares to sell the new stock. Eventually, this inventory KPI measures the productivity of your business’s inventory receiving process.

You can implement this formula to figure out the time to receive:

Time to receive = time required for stock validation + time required to add stock to records + time to prepare stock for storage

Put away time

Put away time indicates your company’s time to stow, store, or put away inventory. The lead time decreases as efficiency increases in stowing away inventory.

You can determine put away time with the given formula:

Put away time = total time required to store received stock

Supplier quality index (SQI)

The metric combines and measures your business performance in crucial areas, including prompt replies, material quality, commercial postures, quality systems, corrective actions, and delivery quality. It is one of the broadest KPIs your business can use to evaluate its vendors.

Understanding 18 Critical Inventory KPIs and Metrics

Operational Inventory KPIs

These metrics indicate how well and effectively you operate your business. Here are some of the most prevalent operational inventory KPI

Lost sales ratio

The lost sales inventory ratio indicates how many days a particular product has remained out of stock in comparison to its anticipated sales rate. Furthermore, it demonstrates when your business has run too low on its inventory levels.

You can apply this formula to obtain the lost sales ratio:

Lost sales ratio = (# days product is out of stock / 365) x 100

Inventory shrinkage

The metrics define the amount of inventory your company should currently hold but cannot account for. Simply put, you have listed these products on sale but either don’t have them or can’t sell them for various reasons. Theft, damage, fraud, and miscounts often lead to inventory shrinkage.

You can find out the inventory shrinkage with this formula:

Inventory shrinkage = ending inventory value – value of physically counted inventory

Average inventory

The average inventory metric indicates your company’s inventory during a given period. Your aim should be to hold a consistent average inventory level throughout the year.

Here’s the formula to calculate the average inventory:

Average inventory = (beginning inventory + ending inventory) / 2

Inventory carrying costs

You can also refer to inventory carrying costs as inventory holding costs or even the cost of carrying inventory. This metric reflects the percentage of the total amount your company pays to maintain a certain inventory level in its storage. The inventory carrying costs include rent, labor, insurance, warehouse, and the cost of unsellable items.

The total carrying cost of inventory can depend on the types of products your business sells, the storage location, the number of SKUs, the inventory turnover ratio, and whether your company employs the services of a third-party fulfillment provider.

Here’s a formula to determine inventory carrying costs:

Inventory carrying costs = [(service costs of inventory + risk costs of inventory + storage cost + capital cost) / total value of inventory] x 100

Gross margin percentage

The gross margin percentage reflects the part of your selling price that is the gross margin. Furthermore, this metric indicates your firm’s profit levels.

You can determine the gross margin percent with this method:

Gross margin percent = [(total amount of revenue – cost of goods sold) / total amount of revenue] x 100

Order cycle time

Order timeliness, or the order cycle time, is the average time your company takes to fulfill an order placed by the customer. Furthermore, order cycle time can reflect your business’s effectiveness in meeting customer demand, delivering orders, and shipping readiness.

Stock outs

You probably know stock-outs by out-of-stock items. The metric indicates the number of inventory you don’t have when customers place an order. Furthermore, the KPI reflects your company’s ability to adjust to spikes in customer demand. Thus, you should aim to keep this percentage low.

You can consider the below formula to capture stock-out rates:

Stock-outs = (no. of items out of stock / no. of items shipped) x 100

Lead time

Lead time refers to the total time between when a customer has placed an order and when they have received it. Simply put, lead time is how long a customer takes to receive a product once they place the order. This operational inventory KPI helps you measure the efficacy of the entire supply chain network.

You can use this method to compute lead time:

Lead time = time for processing orders + lead time in production + delivery lead time

Understanding 18 Critical Inventory KPIs and Metrics

Inventory Metrics: Best Practices

You can implement best practices for inventory metrics by measuring the correct elements. Some points to consider before you roll out new KPI metrics:

  • Identify and define your inventory KPIs
  • Train the team that will use the inventory metric
  • You should ensure that the team processes support your chosen inventory metrics.
  • You should create benchmark targets for your staff to achieve.
  • You should regularly adjust the benchmarks and set up a schedule for reviewing the success.
  • You should create a dashboard to display the metrics and the progress you have made.
Understanding 18 Critical Inventory KPIs and Metrics

Benefits of Inventory KPIs and Metrics

We have compiled the most prominent benefits KPI metrics can provide:

  • KPIs help you set up a method for making and achieving progress.
  • Without measurements, your company can’t meet long-term goals.
  • Inventory KPIs increase sales and revenue for your business.
  • Make your business financially competitive.
  • Enhance your business’s reputation
    Improve your employees’ and operations efficiency
  • It reduces operating costs.
  • It eliminates overall supply chain issues.
  • You can connect your inventory management process to your business’s goals and strategies.
  • Inventory KPIs ensure marketing and merchandising are effective.

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You can use software for automatically pulling inventory data from dashboards instead of sorting manually, calculating, and recording inventory to track KPIs in inventory management in an efficient and orderly manner. Furthermore, inventory management software enables you to track and report different metrics for the stock across all your stores and warehouses.

Product sales or sales revenue measures the revenue generated from customer orders after deducting the number of canceled sales and returned orders. You usually use this reporting metric for a standard period, such as one month or a year.

You can follow this formula to compute product sales:

Product sales = gross sales revenue – discounts – sales returns – allowances

Revenue per unit defines the worth of one unit of product. This sales metric is helpful for your business if it is subscription-based.

Here’s the formula to calculate the revenue per unit:

Revenue per unit = total revenue in a given period/average no. of units sold for the period

The accuracy of inventory KPI helps you make a physical count of items in stock and compare it to the inventory levels recorded in your database. It enables you to align your bookkeeping and inventory data management practices.

More inventory management software apps are available on the market, with bespoke solutions to suit each business’s needs. Stockpile by canvas, Veeqo, Ordoro, Delivrd, Sortly, Inventory Now, Cin7 Inventory and POS, Zoho Inventory, Inventory Control with barcode scanner, Fishbowl, Partender: Bar Inventory Software, to name a few.

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