10 Inventory Management KPIs You Need to Measure in 2019


May 21, 2019
6 MIN READ
Vinculum
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How do you know which strategy is contributing to the success of your business? How do you track what is working well and what not?

Getting answers to these questions is crucial for continuous business growth.

To understand how well a business function is performing, you need to start measuring key performance indicators (KPIs) for that function, today.

In this article, we will tell you 10 most important KPIs that you need to monitor for successful inventory management. They are:

Let’s begin.

1) Stock to Sales Ratio

Formula: No. of units available / No. of units sold

Stock to sales ratio helps you in optimizing your inventory levels.

For example, if your stock to sales ratio rises without a rise in your sales, it means that you have overstocked inventory. It helps you decide when to purchase and when to stop.

2) Sell Through Rate

Formula: ( No. of units sold / ( No. of units sold + No. of units available ) ) x 100

Sell through rate tells you the percentage of inventory sold in a period of time.

For example, if in 30 days you have sold 20 out of 100 chairs, then your sell through rate for that period is 20%.

Sell through rate is a healthy measure to determine whether your investment is doing well or not.

A low sell through rate could mean that you over-purchased or your pricing is too high. Similarly, a high sell through rate could mean that you under-purchased or your pricing is too low.

3) Average Inventory

Formula: ( Beginning inventory – Ending inventory ) / 2

Average inventory is used to estimate the amount of inventory you have during a particular time frame.

This KPI helps you avoid spikes or unanticipated drops in inventory. The idea is to keep inventory flow (inventory in and out) consistent.

4) Days of Inventory On-Hand (DOH)

Formula: ( Average inventory / Cost of goods sold ) x 365

Days of inventory on-hold tells you the average amount of time it takes for you to sell your inventory on-hold.

Suppose, average inventory equals USD 100 and cost of goods sold is USD 1,000. It means your on-hold inventory takes 36.5 days to sell.

If days of inventory on-hand is low, it means that you are moving your stock efficiently. Whereas, a large number would mean excess or obsolete inventory sitting on the shelves.

5) Inventory Turnover Rate

Formula: ( Cost of goods sold / Average inventory )

The inventory turnover rate tells you how many times your average inventory is sold during a period (generally a year).

Let’s take the same scenario where average inventory equals USD 100 and sales is USD 1,000. It means that your inventory turnover rate is 10. Your business turns over your entire inventory 10 times a year.

So, how is it related to days of inventory on-hold?

Inventory Turnover Rate = 365 / Days of Inventory On-hold

Since these 2 KPIs are inversely related, their analysis is also opposite. High inventory turnover rate means you are moving your stock efficiently. Whereas, a low number would mean excess or obsolete inventory sitting on the shelves.

6) Back Order Rate

Formula: ( No. of undelivered orders / Total no. of orders ) x 100

Back order rate is the percentage of orders that couldn’t be delivered at the scheduled time and will be delivered at a later date.

It is an important KPI to measure customer satisfaction. A high back order rate can slow down or even halt the production. So, you should always keep an eye on your backorders.

7) On Time Orders Rate

Formula: ( No. of orders delivered on time / Total no. of orders ) x 100

On time orders rate is the percentage of orders that your customers receive on time. Just like back order rate, it can be used to measure customer satisfaction.

A higher on time order rate would mean satisfied customers and vice-versa.

8) Inventory Shrinkage

Formula: ( Recorded inventory cost – Physical inventory cost ) / Recorded inventory cost

Inventory shrinkage tells you the percentage of inventory that you have in record but can’t be found in physical count i.e. actual inventory.

Inventory shrinkage can be due to multiple factors including miscounting, theft, damage or supplier fraud. In case of inventory shrinkage, a thorough investigation is required from your end.

9) Rate of Returns

Formula: ( No. of items returned / Total no. of items shipped ) x 100

Rate of returns gives you the percentage of shipped items that are returned.

High rate of returns could be due to multiple factors including defective products, malfunctioning items, inferior quality and so on.

10) Holding Cost

Holding cost comprises of four costs:

  • Cost of storage space including utilities, rent, property taxes and insurance
  • Cost of handling the items which includes work hours it takes staff to put them in storage, enter them in the computer and any added security to keep them safe
  • Cost related to loss if the inventory sits too long. It may either deteriorate or become obsolescent
  • Capital cost of having money tied up in unsold inventory

If you buy more inventory, all 4 costs will increase as well. Depending on your affordability, holding cost can help you in inventory planning.

In Summary

Always remember that you need not use all 10 KPIs at once. Depending upon your needs, select the KPIs that make most sense for your business.

If you are new at this then choose a simple KPI such as inventory turnover rate. It will help you understand how well is your inventory performing.

As you start monitoring these KPIs, you will recognize patterns that will help you make decisions to improve inventory management processes.

See how we help brands, retailers and 3PLs improve their inventory management processes through a real-time dashboard view.

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Nice article on warehouse inventory.