10 Inventory KPI Metrics All Businesses Should be Tracking
The Importance of Inventory Management
An effective inventory management process is essential for businesses to ensure that their internal processes are both time and cost-efficient. This can also help in preventing costly issues such as over or under-ordering, stock-outs, and spoilage.
Tracking, measuring, and assessing workflow processes using inventory key performance indicators (KPIs) will provide companies with the information they need to streamline business processes, enhance supply chain management, and improve customer service. By quantifying performance, management can also ensure that the inventory management practices are directly serving the broader company goals and bottom line.
There is a wide variety of inventory KPIs, each pertaining to a different aspect of stock control, but these metrics are generally used to establish benchmarks for performance. They can encompass static numbers or broader milestones for certain projects and periods of time. The resulting KPI data is used in analyses to provide insights on how to drive further improvements.
10 Key Inventory KPIs to Know
When considering the relevant KPIs to track for inventory management, companies should consider the following essential metrics.
1. Forecasted Demand Accuracy
Knowing how accurate a business is in forecasting the demand for products is essential to reducing back-ordering and carrying costs. This allows the company to meet customer demand effectively without resulting in excess products or running out of high-demand items.
When businesses overstock inventory, they risk incurring heightened holding costs, as well as the potential for this stock becoming obsolete. On the other hand, running out of key inventory can lead to losses in capital due to missed opportunities.
2. Available Inventory Accuracy
To keep inventory moving through the sales process and cash flow streaming in steadily, businesses must have accurate records of previous and current stock levels. This KPI makes it easier to manage inventory turnover and produce forecasting insights. Accurate real-time counts of on-hand stock are critical to the creation of reliable financial reporting and planning.
3. Order Accuracy
This metric assesses whether the correct items are being sent to customers within the expected time frame. Order accuracy KPIs directly relate to customer satisfaction. Also known as Perfect Order Performance, this KPI is crucial for maintaining consumer retention and loyalty, with most companies aiming to reach over 99% accuracy in order fulfillment. One metric that can be used for this KPI is the On-Time Order metric, which defines the percentage of time that customers receive their orders on time.
On-Time Order % = Number of Orders Delivered On-Time / Total Number of Orders.
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4. Order Timelines
The three different metrics of this KPI include-
- Ready to Ship - This figure measures which orders are packaged and ready with shipping documents to be picked up for delivery.
- On-Time Shipment - This is the number of orders shipped at the expected time once they are prepared.
- On-Time Delivery - This measures the number of orders that arrive within the estimated time frame. This metric also works with the Order Accuracy KPI.
5. Inventory Cycle Time
Also known as the Order Cycle Time, this KPI measures the length of time from when an order is placed to when the product is shipped by the company or received by the customer. Essentially, the shorter the cycle, the more orders can be processed. Likewise, the higher the fill rate for the order, the faster the customers get their products.
Additional metrics within this KPI include internal processing times and the Put-Away (also known as Dock-to-Stock), which measures the time it takes for a business to receive a product then stock it on their shelves.
6. Inventory Carrying Cost
This KPI is essential to determine how much working capital is actually sitting on the shelves as inventory, rather than being used for product development or business expansion.
The carrying cost of inventory combines various inventory KPIs, such as deadstock, put-away, and warehouse management efficiency. Working out this cost helps to fine-tune stock levels to determine how items are being sold, and which products to prioritize for the maximum rate of capital return.
The formula works out how much a company needs to spend as a percentage to store inventory annually. Reducing the carrying cost requires limiting slow-moving, obsolete, or dead inventory.
% = Carrying Costs / Overall Cost.
Also known as deadstock, this KPI reveals which products are not selling and which are ultimately limiting resources, instead of creating profit. This stock could be damaged, obsolete, expired or destroyed. Deadstock should be removed as soon as possible to keep storage and labor costs down.
8. Inventory Turnover Rate
This is a measure of how many times inventory has been sold and then replaced (turned over) within a specific time frame. Generally, the higher the inventory turnover is, the more profitable a company will be. However, some companies may specialize in products that will sell more slowly (cars, for example) so the ideal inventory turnover will vary per item.
There are two formulas businesses can use to calculate this rate-
- Sales / Average Number of Inventory
- Cost of Goods Sold / Average Number of Inventory
9. Customer Satisfaction
There are many ways to measure customer satisfaction, with metrics such as order-to-delivery times, customer ratings, or the number of late orders. Customer satisfaction directly affects an organization's reputation, making this a vital metric to track regularly. Some companies track this KPI by using net promoter scores, which ask consumers to rate a product, brand, or service, using a 0 to 10 scale.
10. Supplier KPIs
Using vendor management KPIs will help businesses to evaluate the effectiveness of the supply chain. The goal is to examine the reliability, performance, and compliance of vendors to ensure that there is the least amount of disruption, errors, and shrinkage of inventory.
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- 10 Inventory KPI Metrics All Businesses Should be Tracking