Proper inventory management is imperative to the success of any business in the wholesale, retail, or logistics industry. However, you’d be surprised to learn that 43% of businesses don’t track their inventory. Without accurate inventory management, it can be difficult to meet customer demand and maintain a smooth flow of operations.
Assuming you already have an inventory management system in place, it’s also important to track inventory management KPIs. These are crucial metrics that form the building blocks of your inventory management system. Tracking inventory management key performance indicators (KPIs) ensures your inventory management is as seamless as can be.
But what are these key performance indicators, and why are they so important? We’re glad you asked and we have all the answers you need right here. In today’s post, we’ll be highlighting the most critical KPIs you need to track in inventory management.
Inventory Turnover
Inventory turnover measures the number of times you sell your inventory in a given period. This metric is important because it helps businesses understand how quickly they are selling inventory and whether they need to order more stock to meet customer demand.
A high inventory turnover rate is indicative of a well-managed inventory and efficient operations. On the other hand, a low inventory turnover rate could mean that inventory is sitting on shelves and not selling, which ties up working capital that could be used elsewhere.
Ideally, you want to have a high inventory turnover rate without running out of inventory. To achieve this, businesses need to strike a balance between customer demand and inventory.
To calculate inventory turnover, divide the cost of goods sold by the average inventory of sales. Take the result and divide it by the inventory to get the inventory turnover.
Average Days to Sell Inventory (DSI)
Average days to sell inventory, or DSI, measures the number of days it takes to sell inventory. This metric is important because it helps businesses understand how quickly inventory is selling and whether they need to order more stock to meet customer demand.
A low DSI is indicative of a well-managed inventory and efficient operations. On the other hand, a high DSI could mean that inventory is sitting on shelves and not selling, which also ties up working capital that could be used elsewhere.
Ideally, you want to have a low DSI without running out of inventory. To achieve this, businesses need to strike a balance between customer demand and inventory.
Calculating DSI is as easy as dividing the number of days in a period by the inventory turnover. For example, if your inventory turnover for the year was 12 and there are 365 days in a year, your DSI would be 30.42 (365/12). This means it would take you, on average, 30.42 days to sell your inventory.
Holding Costs
Holding costs are the costs associated with storing inventory. This metric is important because it helps businesses understand how much inventory they need to keep on hand to meet customer demand without incurring excessive storage costs.
There are two main types of holding costs: inventory and opportunity. Inventory holding costs are the physical costs of storing inventory. This includes costs like rent, utilities, insurance, and property taxes.
Opportunity holding costs are the opportunity costs of not investing in inventory. This includes the lost interest from not investing in inventory but instead in other assets. To calculate holding costs, add up all of the inventory and opportunity holding costs as a percentage of the average inventory value.
Back Order Rate
The backorder rate is the percentage of inventory that is out of stock. This metric is important because it helps businesses understand how much inventory they need to keep on hand to meet customer demand.
A high backorder rate could mean that inventory levels are too low and not meeting customer demand. This could lead to lost sales and dissatisfied customers. On the other hand, a low backorder rate could mean that inventory levels are unnecessarily high.
Ideally, you want to have a low backorder rate without tying up too much working capital in inventory. To achieve this, businesses need to strike a balance between customer demand and inventory. An inventory app can help you do just that.
Rate of Order Return
The rate of order return is the percentage of inventory that customers return over a specific period. If you’re having too many returns, it could mean that you’re selling defective or expired products. You either need to streamline your inventory management to get rid of expired products or switch suppliers.
A high rate of order returns is bad news for your business. You’ll need to act fast before you lose customers.
Average Inventory
Average inventory is the average amount of inventory you have on hand over a specific period. This metric is important because it helps businesses understand how much inventory they need to order.
Spikes and dips in average inventory are never a good sign. This is indicative of an unstable market or sometimes theft.
Sell Through Rate
The sell-through rate is the percentage of inventory that is sold over a specific period. It lets businesses understand how quickly inventory is selling and whether they need to order more stock to meet customer demand.
A low sell-through rate could mean that inventory is sitting on shelves and not selling as it should. You’ll need to re-strategize to get your products flying off the shelves as expected.
Perfect Order Performance
Perfect order performance measures how often an order arrives on time, in full, and without errors. It gives businesses insight into the efficiency of their inventory management systems.
A high perfect order performance rate means that orders are arriving on time and as expected. A low perfect order performance rate means you need to work on your inventory management process.
Inventory Management KPIs to Keep a Close Eye On
Any small business owner must keep a keen eye on these inventory management KPIs to succeed in their business. They will give you deep insights into your inventory management process and its efficiency.
For smart management, you should consider investing in proper inventory management software. This will make inventory management a lot easier and more accurate.
For more informative content, check out the other posts on the site.
