Important KPIs for Inventory Management

If there’s something every retailer, manufacturer, and e-commerce business can agree on, it’s that better inventory management equals faster growth. However, business growth can’t be measured by intuition or gut feelings. This is where KPIs (key performance indicators) come in.

KPIs are metrics that help businesses monitor and make informed decisions about their stock. Inventory management metrics offer insights into sales, turnover, demand, costs, production processes, consumer behavior, and more. By measuring data and identifying problem areas, businesses can implement necessary adjustments and track their improvement.

While achieving key performance indicators (KPIs) is essential for any business, relying solely on manual efforts can lead to human errors. To excel in inventory management, businesses should consider using cutting-edge inventory planning tools like Inventory Planner to measure KPIs for supply chain management. Inventory Planner is designed to seamlessly complement traditional inventory management systems, creating a dynamic partnership that can easily help your business meet and exceed its KPI targets.

In this article, we’ll explore essential inventory management KPIs and how advanced inventory planning tools can revolutionize your approach, making it more efficient and profitable.

What is a KPI in inventory management?

Key performance indicators (KPIs) in inventory management are essential metrics that enable you to monitor and make informed decisions regarding your stock. They provide valuable insights into turnover, sales, demand, costs, process efficiency, vendor relationships, and more. 

Utilizing advanced inventory management systems simplifies the process of tracking these KPIs, which allow businesses to assess and evaluate the efficiency, effectiveness, and overall performance of their inventory control and management processes. 

How Can Inventory Planner and Other Inventory Management Tools Help? 

Imagine a seamless integration that empowers your organization to identify, reach, and exceed key performance indicators (KPIs). Inventory planning and management tools synchronize your data and transform it into a strategic advantage. From precise demand forecasting that eliminates stockouts and balances your inventory levels to factoring in lead time data and supplier information to optimize ordering processes, the benefits are numerous.

Deadstock and spoilage become history as your inventory planning software prioritizes the sale of aging items. Efficient warehouse operations, improved customer satisfaction, and enhanced revenue can all be achieved with the right tools. 

The future of inventory management relies on reliable information, dynamic analysis, and data-driven decisions. And all that starts with measuring KPIs to see where and how you can improve. Let’s take a look at some of the most significant inventory management KPIs: operational inventory KPIs, sales and demand inventory metrics, and employee metrics.

Operational Inventory KPIs

Operational inventory KPIs show how effectively a business manages its inventory. These metrics are essential for measuring the progress of supply chain objectives and identifying areas for improvement. Here are some examples of operational inventory KPIs in inventory management:

• Lost Sales Ratio. The lost sales ratio shows the percentage of potential sales a business loses due to stockouts. The formula for the lost sales ratio is: lost sales ratio = (number of lost sales x total sales) x 100. A high lost sales ratio indicates that a business may need to improve its inventory management processes.
• Inventory Holding Cost. This metric summarizes all the costs of storing and protecting unsold products. The formula for inventory holding costs is: Inventory Holding Cost = (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory.
• Fill Rate. Fill rate is a metric showing the percentage of customer orders fulfilled completely. The formula for fill rate is: fill rate = (Number of complete orders x total Number of orders) x 100. A high fill rate indicates that a business meets customer expectations and reduces the likelihood of returns.
• Perfect Order Rate. A perfect order rate is a metric that shows the percentage of orders delivered without errors. The formula for perfect order rate is: Perfect Order Rate = (Number of perfect orders x total Number of orders) x 100. A high perfect order rate indicates that a business meets customer expectations and reduces the likelihood of returns.
• Lead Time. This KPI measures the time it takes to receive inventory after placing an order. The formula for lead time is: Lead Time = (Date inventory received minus Date order placed) / Number of orders.
• Inventory Shrinkage. This KPI measures inventory loss due to theft, damage, or other reasons. The formula for inventory shrinkage is: Inventory shrinkage = (cost of lost inventory / total inventory value) x 100.
• Customer Satisfaction Score. This metric measures customers’ satisfaction level with the products and services provided by the business. The formula for customer satisfaction is: Customer Satisfaction Score = (Number of satisfied customers / Total number of customers) x 100.
• Order cycle. Order cycle measures the time it takes to fulfill an order from when it is placed to when it is delivered to the customer. The formula for an order cycle is: Order Cycle = (Date order delivered – Date order placed) / Number of orders.
• Inventory Carrying Cost. This KPI measures the cost of holding inventory in stock. The formula for inventory carrying costs is: Inventory Carrying Cost = (Total inventory value x inventory carrying rate) / 365.
• Stockouts. This KPI measures the number of times inventory is out of stock. The formula for stockouts is: Stockouts = (Number of stockouts / Total Number of orders) x 100.
• Average Inventory. This KPI measures the average inventory held in stock over a period. The formula for average inventory is: Average Inventory = (beginning inventory plus ending inventory) / 2.
• Internal Warehouse Management System (WMS) Efficiency. WMS efficiency measures how well the warehouse management system works. The formula for WMS efficiency is: WMS Efficiency = (Number of orders processed / Total time to process orders) x 100.
• Available Inventory Accuracy. This KPI measures the accuracy of the available inventory data. The formula for available inventory accuracy is: Available Inventory Accuracy = (Actual inventory count/system inventory count) x 100.
• Deadstock/spoilage. This KPI measures the amount of inventory that is not sold or has expired. The formula for dead stock or spoilage is: Dead Stock/Spoilage = (Value of Dead Stock/Spoilage / Total Inventory Value) x 100.
• Inventory Carrying Costs. Carrying costs are associated with holding inventory, such as storage, insurance, and handling costs. The formula for carrying costs is: Inventory Carrying Costs = (average inventory value x carrying cost percentage) / 100. A lower carrying cost indicates that a business is managing its inventory effectively.
• Gross Margin Return on Investment (GMROI). GMROI is a metric that shows how well a business turns inventory into profit. The formula for GMROI is Gross Margin Return on Investment = Gross Margin / Average Inventory Investment. The higher the GMROI, the better the business is performing.

Sales and Demand Inventory Metrics

Sales and demand inventory metrics are key performance indicators that help businesses track sales and demand for their inventory. These supply chain KPIs offer insights into inventory turnover, demand, revenue, internal processes, and more. Here are some examples of important sales and demand inventory KPIs :

• Inventory Turnover Ratio. The inventory turnover ratio is a metric that shows how quickly a business is selling its inventory. The formula for inventory turnover ratio is: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory. A high inventory turnover ratio indicates that a business is selling its inventory quickly.
• Average Days to Sell Inventory (DSI). DSI is a metric that shows how many days, on average, it takes a company to sell an item. The formula for DSI is: DSI = (average inventory value in a year x cost of goods sold in the year) x 365. A lower DSI indicates a more efficient operation.
• Sell-Through Ratio. The sell-through ratio is a metric that shows the percentage of inventory that is sold during a specific period. The formula for the sell-through ratio is: Sell-Through Ratio = Units Sold / Beginning Inventory. A high sell-through ratio indicates that a business is selling its inventory quickly.
• Accuracy of Forecast Demand. Accuracy of forecast demand is a key performance indicator for supply chain management that shows how well a business is predicting the demand for its products. The formula for accuracy of forecast demand is: Accuracy of Forecast Demand = (actual demand minus forecast demand) / actual demand. A high accuracy of forecast demand indicates that a business is predicting demand accurately.
• Rate of Return. The rate of return is a supply chain KPI that shows the percentage of inventory that is returned by customers. The formula for rate of return is: Rate of Return = (number of units returned x total Number of units sold) x 100. A high rate of return indicates that a business may have quality control issues or is not meeting customer expectations.
• Days/Weeks on Hand. This metric measures how quickly a business sells through its average inventory on hand. The formula for Days/Weeks on Hand is: Days/Weeks on Hand = (Average Inventory Value / Cost of Goods Sold) x 7 or 365. A lower number of days or weeks on hand indicates that a business is selling its inventory quickly.
• Stock-to-Sales Ratio. This metric shows the relationship between inventory levels and sales. The formula for the stock-to-sales ratio is: Stock-to-Sales ratio = average inventory value divided by average sales per day. A lower stock-to-sales ratio indicates that a business is managing its inventory effectively.

Employee Inventory KPIs

Employee KPIs are critical for supply chain management as they help monitor and evaluate the performance of employees and their impact on inventory management. Some of the employee KPIs that can be used for inventory management include:

• Labor Cost. This KPI measures the labor cost per hour worked by an employee. It is calculated by dividing the employee’s annual gross salary by the number of weeks they work in a year and then dividing that by the number of hours they work in a week. The formula for LCPH is: Labor Cost Per Hour = (Employee annual gross salary / Number of weeks an employee works in a year) / Number of hours an employee works in a week.
• Employee Turnover Rate. The employee turnover rate measures the rate at which employees leave a company during a specific period of time. It is an important KPI for businesses to track, as it can help them identify areas for improvement in their human resources management system. To calculate the employee turnover rate, divide the number of employees who left the company by the average number of employees during a given period of time, then multiply that number by 100 to get the percentage. The formula can be expressed as follows: Employee Turnover Rate = (Number of Employees Who Left / Average Number of Employees) x 100.
• Labor Cost Per Item. This represents the amount of money a business spends to make one unit of a product, also called the unit labor cost. This metric takes into account the salaries of the employees as well as any other expenses incurred during the manufacture and sale of a product. Utilize this calculation to get the labor cost per item: Labor Cost Per Item = # total units / total labor expense.

How to Select the Right KPIs for Your Inventory Management Needs

Selecting the right KPIs for your inventory management needs is crucial to accurately assessing your processes, making needed changes, and improving your overall inventory management efficiency. Here are some tips to help you choose the right KPIs for your inventory management needs:

• Use SMART System. Your KPIs should be specific, measurable, attainable, relevant, and timely (SMART). Ensure that the KPIs you choose meet these criteria.
• Prioritize the Right KPIs. KPIs should be aligned with your organization’s strategic goals. Return to your strategic goals and select your top three priorities. After that, develop at least three inventory management KPIs for each.
• Limit the Number of KPIs. The more you limit your KPIs, the more specific, measurable, attainable, relevant, and timely they are. Choose a few KPIs that are most important to your business.
• Review Results. Changes in your organization’s or team’s objectives are inevitable. That’s why reviewing your KPI results, perhaps with a scorecard or a dashboard, is crucial to the process.
• Create a Dashboard. Creating a dashboard to display the metrics and the progress you have made can help visualize your progress and ensure you stay focused on your goals.

Identify, Track, and Report Your KPIs with Inventory Planner

The best way to elevate your inventory planning processes and track the KPIs that matter most to your business is through Inventory Planner—a best-in-class software that seamlessly integrates with traditional inventory management systems to supercharge your KPI tracking and goal achievement. As the saying goes, “You can’t control what you don’t measure,” and that’s where Inventory Planner comes in. 

KPIs are the lifeblood of your business, impacting every facet, from sales to operations. Inventory Planner can help identify your most crucial KPIs, and our powerful cross-functional software simplifies the process by tracking all your metrics in a user-friendly dashboard, putting the data directly in your hands. There’s no better time to get started on the path to inventory excellence than now.