In the current landscape of business, effective inventory makes a difference between success and failure. To ensure that inventory levels are always optimised and everyone is efficiently utilising the resources, businesses take the help of special metrics. These are inventory management KPI.
So, let’s see what KPIs are and how they work.
Understanding Inventory Management KPIs
Inventory KPIs or inventory Key Performance Indicators are quantifiable, specific metrics. They help businesses to track, measure and optimise their inventory management processes.
Companies will gain insights into the performance of their inventory practices with these metrics. They can also learn to identify the areas that desperately need improvement,
Here are a few KPIs that can change your inventory game.
10 Inventory Management KPIs
When it comes to inventory management, KPIs indicate how a company’s stocks perform. Management gets an insight into the costs of goods sold (COGS), inventory turnover, demand, revenue, internal processes and more.
So, let’s see ten inventory KPIs to keep an eye on:
1. Inventory Turnover Ratio
This KPI is responsible for measuring the number of times a business’s inventory is sold and replaced over some time, usually a year. A higher turnover rate means efficient inventory management and high product demand. Alternatively, a lower rate might suggest overstocking or outdated stock.
| Inventory Turnover Rate= Average Inventory / Cost of Goods Sold |
2. Accuracy of Forecast Demand
This KPI assesses how accurately a business can predict the demand for its products. It works by comparing the forecasted sales. Then companies can adjust their procurement and production processes accordingly. A higher accuracy rate reduces the risk of understocking or overstocking. This ensures customer demands are fulfilled without any excess costs.
3. Inventory Carrying Costs
Ever wonder how much it costs to keep all that stuff in stock? That’s what carrying costs are all about. It’s the money you spend on things like storage space, insurance, and even taxes for having inventory on hand. By keeping these costs in check you can ensure that you have the right amount of stock.
With that, let’s see another popular inventory management KPI.
4. Rate of Return
The other name for it is the return rate. This KPI measures the percentage of products that the customers return. A high return rate is indicative of issues with product quality mismatched customers or customer service. Therefore, companies need to address these reasons for returns for better customer satisfaction and reduced costs for processing repeated returns.
Gross Margin Return on Investment (GMROI)
Gross Margin Return on Investment (GMROI) measures the profitability generated from inventory investments. It reflects how efficiently a business transforms its inventory purchases into gross profit. A higher GMROI indicates that inventory purchasing decisions are effective, whereas a lower GMROI might signal inefficiencies or unprofitable inventory. The formula for GMROI is:
| GMROI=Average Inventory Cost/Gross Margin |
5. Backorder Rate
This rate measures the number of orders that companies cannot fulfil at their time of placement due to a lack of inventory. This is an indicator of stockouts and may affect customer satisfaction.
A high backorder rate may suggest inadequate inventory levels or forecasting demand failures. Companies need to track this rate to determine if they need to adjust inventory levels or adjust their demand predictions. A lower backorder rate is good- it means your customers are happy.
6. Order Cycle Time
This inventory management KPI refers to the duration between the moment the customer places the order to the moment it gets delivered. With this KPI, businesses have insights into the efficiency of their order processing and fulfilment processes.
A shorter cycle ensures high customer satisfaction as they receive their orders promptly. When you analyse this metric, you can identify the bottlenecks in your business supply chain. So, you can take corrective measures to optimise delivery times.
7. Number of Stock-Outs
The phrase “stock-out” means “sold out” .
Being out of stock means having no inventory to sell, which halts revenue and necessitates ordering more inventory. This highlights the importance of avoiding stock-outs. The first step to preventing future stock-outs is understanding when and how they occur. This inventory management KPI measures the number of times demand goes unfilled due to a lack of inventory within a specific period. Essentially, it provides a broad view of how effectively a business is managing its inventory.
This KPI is measured by counting the instances when orders go unfulfilled because of insufficient inventory. Here’s the formula:
Stock-Out Rate=Number of unfulfilled orders due to lack of stockTotal number of orders placed×100
With that let’s see another inventory management KPI.
8. Lead Time
This one is a supplier-centric KPI. Lead time is crucial not only for inventory management but also for managing supply chains. It measures how long your suppliers take to deliver an order from the moment it’s placed.
Ideally, lead time should be as slow as possible. This means you receive the supplies and goods from your supplier with a quick turnaround time. Calculating the lead time for your supplier helps you understand which parts of your inventory need better planning.
Here’s how to calculate:
Order process time + production lead time + delivery lead time
Not just the time your supplier is important, it’s also about the quality of the products they deliver. Of course, bad quality will lead to recall and more time thus driving up extra expenses.
Here’s an inventory management KPI you need to consider.
9. Supplier Quality Index
Another key KPI that influences your inventory management strategy is the supplier quality index. This comprehensive measure aggregates various attributes of a supplier’s performance. Implementing the supplier quality index as one of your KPIs allows you to develop a proprietary supplier ranking system, helping you mitigate potential supplier risks.
The inventory management KPI can include several performance aspects, such as the quality of goods delivered, the effectiveness of corrective actions, and the level of communication. Each factor can be weighted according to its importance to your business, and the resulting score reflects the supplier’s overall quality.
While the calculation of the supplier quality index can vary based on the chosen metrics, a sample formula is provided below:
(Quality of goods x 50%) + (standard of corrective actions x 25%) + (communication x 25%)
But what about problem management KPIs? Here’s one that you need to know. Check it out below.
10. Inventory Shrinkage
What if there is a difference between the actual stock on hand and the amount mentioned in the records? That is inventory shrinkage. This discrepancy can happen due to reasons like miscounting, theft, damage or administrative errors.
Shrinkage if unchecked can lead to heavy financial losses. Therefore, it’s crucial to monitor this KPI. Businesses that do so can identify the shrinkage sources and undertake preventative measures.
Remember a lower shrinkage rate means better inventory management.
Keep in mind all these KPIs as you assess and manage your inventory. With them, you are less likely to encounter any major mishaps.
FAQs: 10 Inventory Management KPIs Measuring Effective Management
What is the KPI for ageing inventory?
Ageing inventory KPI is a type that records the products that are past their selling date window. This is most applicable to food and drink retailers. They can track of items that are out-of-date or expired.
What are the types of inventory?
Raw materials (any supplies that are used to produce finished goods), work-in-progress (WIP), and finished goods are the three main inventory types.
What is COGM?
Cost of goods manufactured (COGM) is a financial metric depicting the total expenses of a manufacturing business for producing finished goods.
Conclusion
Effective inventory management secures the difference between success and failure. To ensure optimal inventory levels and resource efficiency, it’s best to rely on these ten inventory management KPIs. Explore how Qodenext ’s supply chain solutions can enhance your inventory management today!
