Inventory can play a substantial role in the health of a business—having too much can cause problems, as can having too little. Possible troubles can include increased costs, missed sales and frustrated customers who can’t get their orders filled. By using key performance indicators (KPIs) to track and manage inventory, businesses can improve purchasing and production processes, cash flow and profitability.
What Is a KPI in Inventory Management?
Key performance indicators (KPIs) in inventory management are metrics that help you monitor and make decisions about your stock. In inventory management, KPIs matter because they offer information about turnover, sales, demand, costs, process success, relationships and more.
Benefits of Inventory KPIs
Inventory KPIs are beneficial because they set up a method to measure and achieve progress in a company. Without measurements, companies can’t set or meet goals. Appropriate KPIs direct behavior, productivity and decision-making.
Other benefits inventory KPIs can provide:
- Increase sales and revenues.
- Make the business financially competitive.
- Improve customer relations and satisfaction.
- Enhance the company’s reputation.
- Improve productivity for employees and operations.
- Reduce operating costs.
- Eliminate supply chain issues.
- Connect inventory management to company strategy and goals.
- Ensure marketing and merchandising is effective.
How to Choose the Right Inventory Management KPIs
Choose the right inventory management KPIs—ones that are specific, measurable, achievable, relevant and timely (SMART) to your business. Only spend time on KPIs that move your business toward its strategic goals.
Other Factors to Consider for Inventory Management KPIs
When developing KPIs, it is essential to target them narrowly to the business unit. Sometimes, new measures can feel overwhelming to staff. Consider selecting a few KPIs per area to start. Work with department managers to understand:
- Whether the chosen KPIs are dynamic?
- How job tasks will change.
- Whether the metric will increase effectiveness, not just efficiency?
- How can staff act upon the insights you learn from the metrics?
- Whether the KPIs align with the company’s mission, goals and objectives?
- How KPIs could affect staff competition or collaboration?
- Whether the metric measures what you want to know?
- Whether the metrics apply to areas that need real improvement?
Top 8 Inventory Management KPIs
When it comes to inventory management, there are several metrics worth considering. Since every company is different, the key is to determine which make the most sense for you. Here are 8 popular inventory management KPIs to consider:
1. Perfect-Order Frequency
Definition: How many orders a company ships without any issues, such as damage, inaccuracies or delays.
Formula: ((orders delivered on time ÷ orders) x (orders complete ÷ orders) x (orders damage free ÷ orders) x (orders with accurate documentation ÷ orders)) x 100
What it means: How often does your company deliver a perfect order free of missing, broken, or otherwise defective inventory? As inventory management becomes more difficult—larger scale, faster speed, higher expectations, more complexity—perfect fulfilment gets harder, and failure has bigger consequences. Tracking the percentage of orders that arrive without problems reveals something fundamental about whether inventory management is working.
2. Fill-Rate Effectiveness
Definition: Fill-Rate Effectiveness, also called line fill rate, is a measure of all portions of the supply chain, including the order fill, line fill and unit fill. This important metric helps companies monitor order fills and line fills.
Formula: ((total items – shipped items) ÷ total items) x 100
What it means: Similar to the perfect order frequency, this metric tracks how often requests for products or materials from specific production locations get fulfilled as required. The fill rate effectiveness helps you understand how well your supply chain partners are performing. If there are weak links in the chain, it’s apparent in this metric.
3. Gross Contribution Margin by Segment
Definition: Gross margin percent is the portion of the selling price that is gross profit. This metric describes the level of profits.
Formula: ((total revenue – cost of goods sold) ÷ total revenue) x 100
What it means: Another way to track the performance of individual production locations is to examine how much each one contributes to gross revenues. You can take this analysis a step further by monitoring the gross contribution for specific products or business units, thereby understanding where and how inventory brings revenue into the organization.
4. Order-Cycle Time
Definition: Order cycle time (OCT), also known as order timeliness, is the average time it takes for a company to fulfill a customer order. It demonstrates how well companies meet demand, including shipping readiness, shipping and delivery.
Formula: (time customer received order – time customer placed order) ÷ total shipped orders
What it means: The amount of time it takes between when a customer places an order and when they receive it reveals how well the constituent parts of inventory management work together. Like many metrics on this list, the figure at any given time matters less than knowing whether the cycle time is slowing down or speeding up and to what degree.
5. Turnover
Definition: A ratio that shows how many times inventory was sold and replaced during a specific time period.
Formula: sales ÷ average Inventory or sost of goods sold ÷ average inventory
What it means: This KPI tells you how fast you are selling your inventory. It’s often measured against the turnover rate of industry averages. When your turnover rate is low, it indicates you have weak sales and excess inventory. A higher ratio shows that you have either strong sales or it could indicate that you are giving customers large discounts.
6. Sell-Through Rate
Definition: The percentage of units sold during a specific time period.
Formula: units sold ÷ (units sold + on-hand inventory)
What it means: Another way to track turnover is with the sell-through rate, or the comparison between how much inventory a company sells versus how much it receives over the same period. When inventory management works correctly, the amount sold versus received will be close in size.
7. Supplier-Quality Index
Definition: Supplier quality index (SQI) aggregates and weighs a vendor’s performance in important areas such as material quality, corrective actions, prompt reply, delivery quality, quality systems and commercial posture.
Formula: (material quality x 45%) + (corrective action x 10%) + (prompt reply x 10%) + (delivery quality x 20%) + (quality systems x 5%) + (commercial posture x 10%)
What it means: Supplier quality can make or break a supply chain. Find a consistent way to gauge supplier performance—rate of on-time delivery, consistency of perfect order, etc.—and use that to distinguish good suppliers from bad. The index is usually based on the percentage of materials received meeting specified quality requirements.
8. Dead Stock/Spoilage
Definition: Dead stock is inventory no one wants to buy. When the company cannot sell the remaining inventory after a time, the stock is “dead.” Spoilage is the same concept, but for fresh items such as expired food.
Formula: (amount of unsellable stock in period ÷ amount of available stock in period) x 100
What it means: This stock may be a write-off because of its diminished value. The percentage of stock that is dead stock is an important metric because it indicates the company’s viability. Companies with more than 25-30% dead stock are not competitive. Before calculating, determine the point at which you’ll consider stock dead or spoiled. For example, at the end of a season, some unsold inventory may be considered dead.
Conclusion
Knowing which inventory KPIs to monitor and understanding what they mean is critical to effectively managing your inventory. The above gives you a good start on which inventory management metrics you should be looking at, but ultimately, you need to determine which ones will make your operations more efficient, while keeping your customers happy. If you are not currently documenting and tracking your inventory KPIs regularly, your competition already has the jump on you.
Use Elmasys Inventory Management Software to Simplify KPIs and Metrics
Monitoring inventory KPIs is essential for tracking the health of your business. That’s why it’s crucial to have an inventory management tool that can power a KPI product dashboard and show changes in real time.
