Asset Intelligence and Management

Asset Intelligence and Management

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Inventory KPIs: Importance, Challenges, and Solutions

Inventory key performance indicators (KPIs) are metrics used to assess and evaluate the inventory processes for a business. They help you monitor and make decisions about your stock. When used in the right manner, they can offer information about turnover, demand, and costs. In this way, having a set of KPIs in place enables businesses to track progress and escalate performance accurately and in the right direction. 

While having KPIs in place is important, it is critical to have the right ones. A business can set suitable KPIs based on its goals and targets. For example, if the annual goal is to cut down costs, then a relevant inventory KPI to measure would be carrying costs. By tracking the right KPI, businesses can identify areas where their inventory management is working well and areas where it could be improved. 

In this article, we’ll discuss the importance of monitoring inventory KPIs, some of the challenges businesses face in tracking them, and solutions to overcome those obstacles. Let’s dive in!

5 reasons to track inventory KPIs 

Tracking critical inventory management KPIs regularly provides data-driven insights to optimize inventory planning and management. 

5 reasons to track inventory

Here are 5 key reasons why you need to track inventory control KPIs:

Improved Decision Making

Tracking inventory key performance indicators provides enterprises with greater visibility into their current inventory health and helps guide better decision-making. KPIs like turnover ratio, days on hand, and fill rate help businesses identify problems or inefficiencies in their inventory operations. 

They can make data-driven decisions to optimize inventory levels, minimize waste, streamline workflows and improve productivity levels. These inventory performance metrics also help them answer key questions on what levels of stock to maintain, when to replenish, and how to avoid shortages.

Reduced Holding Costs  

Monitoring inventory metrics can help minimize excess inventory and reduce holding costs. Metrics like days of supply can indicate when you’re carrying too much stock. This excess stock piles up holding costs in the form of warehouse rent, staffing, insurance, and spoilage. 

Tracking KPIs can guide decisions to optimize safety stock levels and free up working capital by reducing excess inventory. The cost savings from reduced inventory holding costs directly benefit the bottom line of the business.

Better Demand Forecasting

Analyzing inventory KPIs over time provides valuable data to improve demand forecasting. Metrics like historical inventory turnover rates and seasonal stock fluctuations help forecast future demand. 

Accurate demand forecasts enable you to stock adequate inventory to meet business needs while reducing safety stock. Improved demand planning through inventory efficiency can reduce waste, minimize backorders, and improve service levels.

Improved Capital Efficiency 

One key reason to track inventory control KPIs is to improve capital efficiency. Optimizing inventory levels reduces the amount of cash  tied up on the balance sheet. 

By tracking inventory control KPIs, excess capital can be identified and leveraged for more productive uses. Minimizing excess inventory without risking stockouts improves inventory turnover rate. The result is improved utilization and return on inventory assets. 

Enhanced Profitability 

Tracking inventory key performance indicators improves overall business profitability. Optimized inventory ensures you meet business requirements efficiently at the lowest possible cost. Minimizing waste, backorders and inventory write-offs all benefit the bottom line. 

Lower holding costs coupled with improved turnover directly enhances profit margins. Monitoring inventory benchmarks provides the visibility to make optimal decisions that reduce costs and boost revenue.

5 key inventory management KPIs

In order to ensure businesses are utilizing inventory in the right way, it is critical to track the right KPIs according to your requirements. . The top 5 inventory performance metrics to track are:

Inventory turnover ratio

Inventory turnover ratio measures how efficiently a business manages its inventory over a period of time. A higher ratio signals fast moving inventory while a low turnover indicates potential excess stock. Comparing the ratio to industry benchmarks allows a business to evaluate its performance.

Monitoring this metric helps identify slow-moving inventory. A business can then take steps to optimize inventory levels accordingly. Higher turnover reduces holding costs and frees up working capital.

Inventory turnover rate = Cost of goods sold / Average inventory value

Demand forecast accuracy 

Demand forecast accuracy compares projected demand to actual demand realized. It assesses inventory planning and predictability of inventory requirements. A higher accuracy means demand is forecasted close to actuals.

Tracking this metric enables data-driven adjustments to inventory procurement, production, and positioning plans. This minimizes excess stock accumulation while maintaining high service levels.

Demand forecast accuracy = (Actual demand / Forecasted demand) x 100

Shrinkage rate

Shrinkage rate calculates inventory losses from theft, spoilage, damage or other causes. It is shown as a percentage of total inventory value. A higher shrinkage rate indicates increased losses and revenue leakage from inventory.

A proactive approach, such as process improvements, security measures, and quality  control  decrease further revenue leakage due to inventory depletion. 

Shrinkage rate = (Lost inventory value / Total inventory value) x 100

Fill rate

Fill rate measures a business’s ability to meet demand from existing stock. A high fill rate indicates a business is carrying adequate safety stock to meet customer needs.

Tracking this metric guides tuning inventory levels to balance minimizing excess stock while avoiding shortages. This optimizes working capital needs.

Fill rate = (Number of orders filled / Total number of orders placed) x 100

Carrying cost of inventory

Carrying cost of inventory calculates the costs of holding and storing inventory, including warehousing, logistics, taxes, insurance, and capital costs. It is shown as a percentage of total inventory value. A higher carrying cost indicates greater expenses tied up in inventory holdings.

Monitoring this metric quantifies the expense of excess inventory holdings. It highlights opportunities to improve inventory efficiency through increased turnover. 

Carrying cost of inventory= (Total holding costs / Average inventory value) x 100

Challenges in tracking inventory KPIs

While monitoring inventory KPIs provides reliable insights about business growth, many businesses face challenges in tracking them consistently and accurately. Here are the three most common challenges businesses face when tracking KPIs for inventory accuracy:

Inconsistent tracking 

The first challenge often faced is inconsistent tracking of inventory management KPIs. Without diligent monitoring of key metrics on an ongoing basis, businesses lack reliable data to base inventory decisions on. Inventory needs to be monitored daily or weekly, not just monthly or quarterly. 

Businesses may track diligently during peak seasons but neglect it when business is slow. Consistent tracking is vital, especially for perishable or seasonal inventory. Inconsistent tracking gives an incomplete picture and unreliable trends.

Inaccurate data

Even with regular tracking, the data is ineffective if inaccurate. Inventory data inaccuracy can stem from various issues. Wrong units of measure, data entry errors, incorrect placeholdersx, and poor physical counts can compromise data integrity.

Lack of real-time tracking also contributes to inaccurate KPIs. With manual processes, data is often outdated. Delayed updates mean metrics may reflect old stock levels, misses shipments or returns and distorts key indicators.

Limited visibility

Often inventory tracking is limited to the warehouse or stockroom only. Lack of real-time visibility across the entire inventory chain restricts full insights.

For companies with multiple locations, each store manager knows their own stock levels. But roll-up reporting to see the full company inventory picture is missing. This fragmented view of inventory makes company-wide planning difficult. 

How inventory management software enhances KPI tracking

With advanced inventory management software, companies can monitor and track key performance indicators to maximize asset utilization. Here is how it helps: 

Inventory management forecast of 2021 to 2028

Real-time visibility 

Asset management software grants real-time visibility into asset performance by consolidating data points into a unified centralized system. This provides access to up-to-date metrics across all locations for faster and more agile decision-making. 

Rather than waiting for delayed static reports, managers can instantly view any issues as they arise and take timely corrective action. Real-time KPI tracking enables a proactive response as situations develop, rather than reactive firefighting after a lag. 

Improved data accuracy

The inventory management software enhances accuracy and reduces errors by automating data collection from barcodes. , All assets are validated using the same rules and logic to ensure consistency and integrity. 

This results in reliable data that leads to trustworthy KPIs precisely reflecting true performance rather than distorted metrics due to human data-entry mistakes. Accurate insights empower teams to make well-informed decisions in optimizing assets by identifying underperformers. 

Deeper insights and analytics

Sophisticated analytics within asset management software generate deeper strategic insights from granular-level KPI analysis. Interactive data visualization tools and custom reporting enable drilling down into asset trends and patterns undetectable in standard reports. 

Segmenting data by parameters like location or asset type reveals performance correlations to inform predictive maintenance and other optimization strategies. The powerful analytics turn raw data into actionable intelligence for continuous improvement across the asset portfolio. This is a possible reason why investments in cloud-based inventory management platforms are growing at a rate of 30% annually

Integration with systems

Integrating the asset management system with existing ERP, CRM, financial, and other core platforms provides comprehensive visibility by sharing data across silos. Asset performance data feeds into financial planning, budgeting, customer service, and enterprise-wide decisions, aligning KPI tracking. 

Open API architecture enables flexible bi-directional data flows between the software and diverse systems for maximum value. Rather than an isolated silo, the software becomes an integrated component of holistic performance management when synced with the IT ecosystem.

Customized KPI dashboards

Role-based dashboards allow each user to configure customized displays aligned to their specific performance indicators., The Finance team monitors budget vs actuals, while production focuses on output metrics. 

Each team can filter and visualize the most relevant KPIs to eliminate data noise. By putting the most critical performance metrics at employees’ fingertips, customized dashboards provide information they need daily to make decisions, and stay aligned to targets.

Improved collaboration

Breaking down data silos via universal access fosters collaboration across functions by providing visibility into shared KPIs for context in decision-making. Cross-functional teams can coordinate goals and activities guided by common data to prevent misalignment. 

For example, finance shares utilization data that helps inform procurement scheduling for optimizing assets enterprise-wide. Controlled permissions balance data security with information sharing to enhance collaborative planning.

Cost savings

 Automated  tracking and  predictive maintenance planning slashes costs. Administrative overheads fall by reducing time-consuming data processes. 

Unplanned downtime and emergency repairs are minimized through condition-based maintenance. Combined with extending asset lifetime, direct and indirect savings accumulate across payroll, operations, capital expenditure, and overhead.

Increased ROI

Cost optimization and performance improvements drive higher ROI across assets by maximizing returns from each investment. Granular KPIs enable progress benchmarking toward strategic targets to continually refine strategy. 

Enhanced  accuracy also prevents losses from decisions based on faulty or incomplete data. With holistic insights, asset management software allows organizations to continually evaluate and maximize asset ROI.

Conclusion

Inventory KPIs are critical for visibility but can be difficult to consistently and accurately track. Manual processes often create flawed or disjointed data, limiting the value of metrics. Advanced asset management solutions address these challenges through centralized real-time data, validation rules, and dynamic dashboards to enhance tracking. With robust solutions that capture reliable inventory metrics, organizations can optimize stock levels, cut costs, and boost profitability.

Frequently Asked Questions (FAQs)

How to choose the right inventory management KPIs?

Choose KPIs that are specific, measurable, achievable, relevant and timely (SMART) to your business. Identify the specific goals of your business with regard to inventory management. For example, do you want to minimize stockouts, reduce inventory levels, or improve inventory turnover? Choose KPIs that are directly related to these goals.

What is the most important KPI for inventory management?

There are many important inventory management KPIs and which one is most relevant to you depends on a number of considerations such as your business type, the product’s supply chain, and market considerations.

What tools and technologies can be used for effective inventory management?

For streamlining inventory, use any modern asset management software, such as EZOfficeInventory. It gives you real-time visibility into stock levels, automates reorders, and helps forecast future demand, all in one place. Think of it as a control center for your inventory, keeping everything organized and efficient.