10 Inventory Management KPIs for Better Performance
These inventory management KPIs will allow you to make the most of your inventory process. They will enable you to monitor and improve performance and help you operate more efficiently.
The core of most business operations is inventory management. It ensures that goods and materials arrive where they need to be at the right time. You need to monitor your performance in order to make the most of your inventory management. You can monitor your inventory management performance by setting KPIs. This will give you the information you need to improve.
We have compiled a list of the most important inventory management KPIs so that you can select the ones that are right for you and begin to gain valuable information about how well your inventory is being managed.
1. Average inventory
You should first be able to keep track of how much inventory you have in your business at any given time. The goal is to maintain a relatively constant inventory in most cases (except for businesses that depend on seasonal demand). You will have to hold too much inventory, and your holding costs will go up unnecessarily. Too little inventory could lead to stock-out problems.
You can monitor the amount of inventory that you have, maybe monthly, to determine if you are over-or under-buying. This will help you to identify spikes and falls and improve your inventory management.
Also read: What is POS Inventory Management System
2. Accuracy of inventory
Knowing inventory shrinkage is also useful. You can monitor and analyze the difference in inventory volume between what you actually have and what you should have according to your inventory management system database.
Mismatches can be dangerous if you have less inventory than your books actually show. You might end up selling items that you don’t have, creating dissatisfied customers.
Although having more inventory than what your database indicates is less trouble, it still indicates that something is wrong. You want to achieve perfect inventory accuracy. This means that your inventory total matches the data in your database.
3. Holding costs
Although it may not seem like it, inventory can be viewed as a liability and not an asset. This is because it costs money to maintain it. This is commonly referred to as real inventory cost. It is the sum of several individual costs such as warehouse rent, employee wages, and inventory loss due to deterioration.
Inventory management is all about managing your inventory costs. This is because the cost of having inventory will affect its profitability. A breakdown of your holding costs at a line level will help you identify areas where you may be overspending and allow you to take steps to lower your costs and increase your profitability.
4. Inventory turnover rate
The speed at which your inventory is turned over, or in other words, how often It’s when inventory is sold and replenished within a certain time period. This is commonly referred to as inventory turnover or days on hand. This is a performance indicator that indicates how long it takes for a batch to sell. It can be useful to understand how much it costs to maintain inventory,
There is no one right inventory turnover rate. It all depends on the specifics of your business. It should be able to ensure that your inventory does not remain in storage for too long so that it doesn’t deteriorate. It is often calculated annually, giving ongoing insight into whether your inventory management strategy is appropriate given your sales velocity.
5. Average days it takes to sell inventory
Similar to inventory turnover, average inventory days is a KPI that measures how long it takes for your company to convert inventory into sales. It’s simply a measure of the longevity of your current inventory. It works in the same way that inventory turnover, providing insight into how much it costs for a batch to be kept.
The sector in which you work will determine the ideal days for inventory to be sold. You will sell more expensive items at a slower rate than those in the lower price ranges. This is why it is important to compare your figures with other businesses.
6. Counting of Stock-outs
Stock-out is another way to say sold out. This is not a situation that any business would want to be in. Being out of stock means that you don’t have inventory to sell. Revenue inevitably slows down and it is best to order more inventory. It’s clear why stock-outs should be avoided at all costs.
Understanding when and how they happen is the first step in avoiding them in the future. This is the purpose of the inventory management KPI. This KPI simply measures how many times in a time period demand has gone unfilled due to a shortage of inventory. It provides a macro-view of how well a business purchases or produces the goods they sell.
This is the count of unfulfilled orders due to a shortage of inventory
7. Lead time
Moving away customer-centric KPIs to supplier-centric ones. Lead time is an important KPI for both inventory management and supply chain management. This is the time it takes for your suppliers to deliver an ordered product from the moment it was placed. It has a significant impact on how you approach inventory management.
You want your lead time to be as short as possible. This means that you can get products or goods from suppliers quickly, which reduces the risk of stock-outs. You can calculate the lead time for each supplier to help you understand which parts of inventory can be replenished quickly and which ones need more planning.
8. Index of supplier quality
Continue with another KPI to measure how suppliers impact inventory management, the supplier quality index is a holistic measure that aggregates various qualities of a supplier. One of the best ways to create a supplier ranking system is by establishing a supplier quality index. this can help you avoid possible supplier risks.
Many areas can be incorporated into the supplier quality index. These include the quality of goods delivered. The standard of the supplier’s corrective actions and the level of communication. You can weigh each element according to how important it is to your business. The resulting score will show how reliable a supplier is.
9. Excellent order rate
Perfect order rate KPI is the percentage of orders shipped that meet all criteria. This includes the correct products, the right quantity, the right packaging, and the right documentation. This is a measure of how efficiently your inventory team delivers the goods you have sold.
High perfect order rates are a sign of high-quality operation. This will usually result in high customer satisfaction. A low percentage of perfect order rates means that your operation lacks certain elements. However, it is important to understand where your weaknesses are most so you can correct them.
10. Rate of Return
Finally, there is the rate of return. This metric measures how many orders are returned. It is very simple and acts as an indicator for the perfect order-rate KPI, If you assume that non-perfect orders will be returned, You can also track the number of returned orders. It’s also a good idea to keep track of what each reason for return means so that you don’t make the same mistakes again.
Low customer satisfaction can be addressed by focusing on the return rate. This will allow you to identify problems in your supply chain, manufacturing process, or approach to inventory management and provide insights into how to fix them.