Inventory can play a substantial role in the health of a business\u2014having too much can cause problems, as can having too little. Possible troubles can include increased costs, missed sales and frustrated customers who can\u2019t 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.<\/p>\n\n\n\n
Key performance indicators (KPIs) in inventory management<\/a> 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.<\/p>\n\n\n\n Inventory KPIs are beneficial because they set up a method to measure and achieve progress in a company. Without measurements, companies can\u2019t set or meet goals. Appropriate KPIs direct behavior, productivity and decision-making.<\/p>\n\n\n\n Choose the right inventory management KPIs\u2014ones 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.<\/p>\n\n\n\n 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:<\/p>\n\n\n\n When it comes to inventory management<\/a>, 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:<\/p>\n\n\n\n \u200b\u200b\u200b\u200bDefinition: <\/strong>How many orders a company ships without any issues, such as damage, inaccuracies or delays.<\/p>\n\n\n\n Formula: ((orders delivered on time \u00f7 orders) x (orders complete \u00f7 orders) x (orders damage free \u00f7 orders) x (orders with accurate documentation \u00f7 orders)) x 100<\/strong><\/p>\n\n\n\n What it means: <\/strong>How often does your company deliver a perfect order free of missing, broken, or otherwise defective inventory? As inventory management becomes more difficult\u2014larger scale, faster speed, higher expectations, more complexity\u2014perfect 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.<\/p>\n\n\n\n \u200bDefinition: <\/strong>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.<\/p>\n\n\n\n Formula: ((total items \u2013 shipped items) \u00f7 total items) x 100<\/strong><\/p>\n\n\n\n What it means: <\/strong>Similar to the perfect order frequency, this metric tracks how often requests for products or materials from specific production locations \u200b\u200b\u200bget 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\u2019s apparent in this metric.<\/p>\n\n\n\n \u200bDefinition: <\/strong>Gross margin percent is the portion of the selling price that is gross profit. This metric describes the level of profits.<\/p>\n\n\n\n Formula: ((total revenue \u2013 cost of goods sold) \u00f7 total revenue) x 100<\/strong><\/p>\n\n\n\n What it means:<\/strong> 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.<\/p>\n\n\n\n \u200bDefinition: <\/strong>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.<\/p>\n\n\n\n Formula: (time customer received order \u2013 time customer placed order) \u00f7 total shipped orders<\/strong><\/p>\n\n\n\n What it means: <\/strong>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.<\/p>\n\n\n\n \u200bDefinition: <\/strong>A ratio that shows how many times inventory was sold and replaced during a specific time period.<\/p>\n\n\n\n Formula: sales \u00f7 average Inventory <\/strong>or sost of goods sold \u00f7 average inventory<\/strong><\/p>\n\n\n\n What it means: <\/strong>This KPI tells you how fast you are selling your inventory. It\u2019s 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.<\/p>\n\n\n\n Definition: <\/strong>The percentage of units sold during a specific time period.<\/p>\n\n\n\n Formula: units sold \u00f7 (units sold + on-hand inventory)<\/strong><\/p>\n\n\n\n What it means:<\/strong> 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. \u200b\u200b\u200bWhen inventory management works correctly, the amount sold versus received will be close in size.<\/p>\n\n\n\n \u200b\u200b\u200b\u200bDefinition: <\/strong>Supplier quality index (SQI) aggregates and weighs a vendor\u2019s performance in important areas such as material quality, corrective actions, prompt reply, delivery quality, quality systems and commercial posture.<\/p>\n\n\n\n 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%)<\/strong><\/p>\n\n\n\n What it means:<\/strong> Supplier quality can make or break a supply chain. Find a consistent way to gauge supplier performance\u2014rate of on-time delivery, consistency of perfect order, etc.\u2014and use that to distinguish good suppliers from bad. The index is usually based on the percentage of materials received meeting specified quality requirements.<\/p>\n\n\n\n \u200bDefinition: <\/strong>Dead stock<\/a> is inventory no one wants to buy. When the company cannot sell the remaining inventory after a time, the stock is \u201cdead.\u201d Spoilage is the same concept, but for fresh items such as expired food.<\/p>\n\n\n\nBenefits of Inventory KPIs<\/strong><\/h3>\n\n\n\n
Other benefits inventory KPIs can provide:<\/strong><\/h5>\n\n\n\n
How to Choose the Right Inventory Management KPIs<\/strong><\/h3>\n\n\n\n
Other Factors to Consider for Inventory Management KPIs<\/strong><\/h5>\n\n\n\n
Top 8 Inventory Management KPIs<\/strong><\/h3>\n\n\n\n
1. Perfect-Order Frequency<\/strong><\/h4>\n\n\n\n
2. Fill-Rate Effectiveness<\/strong><\/h4>\n\n\n\n
3. Gross Contribution Margin by Segment<\/strong><\/h4>\n\n\n\n
4. Order-Cycle Time<\/strong><\/h4>\n\n\n\n
5. Turnover<\/strong><\/h4>\n\n\n\n
6. Sell-Through Rate<\/strong><\/h4>\n\n\n\n
7. Supplier-Quality Index<\/strong><\/h4>\n\n\n\n
8. Dead Stock\/Spoilage<\/strong><\/h4>\n\n\n\n