Running a business is not an easy feat. You need a well-functioning warehouse, and a system in place to measure your inventory consumption regularly.
Without the right KPIs for inventory, you’ll be flying blind – without knowing how much inventory stock you have left. So, for fast-paced businesses, tracking inventory KPIs is the key to being more competitive. The right way to track inventory performance metrics is to have a clear view of the available inventory to efficiently control costs, avoid stock shortages, and ensure that customers are satisfied.
In this blog, we will walk you through the 15 key inventory management KPIs to measure performance, and how an inventory tracking solution can help achieve that.
What are inventory management KPIs
In inventory management, the key performance indicators (KPIs) are the metrics that help monitor your stock so that you can make informed decisions about it. It also includes measuring, managing and tracking the performance of asset inventory from time to time to ensure they are functioning fine. Inventory efficiency can be easily measured with inventory management KPIs because they offer detailed information about inventory turnover, sales, costs, demand, and more.
Once you’ve set inventory benchmarks, you can track the KPIs for inventory accuracy to see the progress and the processes that need to be streamlined.
5 Reasons to track inventory KPIs
Here are 5 key reasons why you need to track inventory management KPIs:
1. Improved decision making
Tracking inventory KPIs gives enterprises 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 stock levels to maintain, when to replenish, and how to avoid shortages.
2. Reduced holding costs
Monitoring inventory metrics can help minimize excess inventory and reduce holding costs – enhancing inventory control. Metrics like days of supply can indicate whether you’re carrying too much stock. Excess stock increases holding costs, such as 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 your business.
3. 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.
4. 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 the inventory turnover rate. The result is improved utilization and return on inventory assets.
5. Enhanced profitability
By tracking inventory KPIs, you can significantly improve your 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 enhance profit margins. Monitoring inventory benchmarks provides the visibility to make optimal decisions that reduce costs and boost revenue.
Classifying inventory management KPIs
There are different metrics to measure inventory management accuracy for each business operation. Each KPI can be categorized into the following:
| Category | Function |
| Sales KPIs | It can be used to compete in the marketplace to get the desired deals and collaborate with other brands. You can also mesh sales KPIs with organizational goals to optimize sales team output |
| Receiving KPIs | Also known as warehouse KPIs, these are concerned with inventory storage. You can track inventory as soon as it is checked in to maintain the right count |
| Operational KPIs | These KPIs tell how successful your business is running and what type of improved processes are required to satisfy customers |
| Employee KPIs | Also known as labor KPIs, these measure employees’ performance. The greater the employee performance, the higher their productivity is |
What are the 15 key inventory management KPIs
To ensure businesses are utilizing inventory in the right way, it is critical to track the right KPIs according to your requirements. The top 15 inventory performance metrics to track are:
1. Inventory turnover ratio
If you want to see how rapidly your inventory converts into sales through the warehouse, then use the inventory turnover ratio KPI. A high turnover rate means that your business sales are strong and reflect the desired KPIs for inventory. Similarly, a low turnover rate indicates lagging KPIs.
The formula for the inventory turnover ratio is:
Cost of Goods Sold / Average Inventory = Inventory Turnover
2. Demand forecast accuracy
Demand forecast accuracy compares projected demand to actual demand realized. It assesses inventory planning and the 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.
The formula for demand forecast accuracy is:
Demand forecast accuracy = (Actual demand / Forecasted demand) x 100
3. Order fill rate
Tracking order fill rate is helpful in measuring a business’s ability to meet the demand for existing stock. A high order fill rate indicates that you have an adequate inventory stock to meet customer orders, and vice versa. With the help of this metric, you can avoid excess and shortage of stock in the warehouse.
The formula for the order fill rate is:
(Number of Orders Filled / Total Number of Orders) × 100 = Order Fill Rate
4. Carrying cost of inventory
The carrying cost of inventory calculates the costs of holding and storage 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.
The formula for carrying cost of inventory is:
Carrying cost of inventory= (Total holding costs / Average inventory value) x 100
5. Inventory days on hand
Also known as Days Sales of Inventory (DSI), it is an inventory management metric used to measure the efficiency of the inventory. You can evaluate how long a stock is held before being sold.
The formula for inventory days on hand is:
Average Inventory Value / (COGS / Number of Days) = DOH
6. Safety stock
Any excess inventory in the warehouse to meet the sudden rise in demand or supply chain issues is identified as safety stock. It brings a certain level of insurance to avoid stockouts. It is helpful to ensure that you don’t run out of the product when demand doesn’t align with the inventory forecast.
The formula to calculate safety stock is:
Safety Stock Needed= (Maximum Daily Usage x Maximum Lead Time) – (Average Daily Usage x Average Lead Time)
7. Stock availability
Stock availability represents the inventory levels kept in the warehouse for selling purposes. If you do not keep track of stock availability, the logistical cost can easily increase. Therefore, it is important to have updated details about inventory visibility in real time.
The formula to measure stock availability is:
(The number of items in stock / the total number of items offered) x by 100 = stock availability percentage.
8. Inventory shrinkage
If the inventory is lost due to external factors such as damage, spoilage, or theft, this metric helps identify the lost inventory.
The formula for inventory shrinkage is:
(Value of Inventory Losses / Value of Total Inventory) × 100 = Inventory Shrinkage
9. Deadstock
Deadstock refers to a product that has not been sold and likely won’t be sold either. Holding this stock will not help the business earn any profit on it but it does cost you money. This can happen when there are fast-selling products in the warehouse.
The formula to calculate deadstock is:
Sellable Inventory – Total Inventory = Deadstock
10. Backorder rate
It is the number presented as the percentage of unfulfilled customer orders due to low stock or supply chain issues. Backorder rate metrics give a better insight into the delays that occur in customer orders. It is one of the most important inventory KPIs because it helps track the efficiency of the supply chain and how well or poorly it operates.
The formula for the backorder rate is:
(Number of Backordered Orders / Total Number of Orders) × 100 = Backorder Rate
11. Revenue per unit
This metric helps you to measure the average earnings from one unit of inventory sold. The higher the revenue per unit, the more items are sold by the company. By tracking this inventory KPI you can track the most profitable inventory and project forecast for future revenue.
The formula to calculate revenue per unit is:
Average Revenue Per Unit = Total Revenue / Total Units Sold
12. Inventory gap forecaster
Inventory gap refers to the inventory level that a business has to meet customer demand. You can easily identify overstock or stock shortages to optimize the inventory levels.
The formula to calculate the inventory gap is:
Inventory Gap = Actual Inventory – Required Inventory
13. Cost per unit
If a business wants to measure how much it spends to produce one unit of inventory, it can track it with cost per unit metric. You can determine the production cost, set a markup, and offer discounts for the product.
The formula to calculate cost per unit is:
Cost Per Unit = (Fixed Costs + Variable Costs) / Units Produced
14. Order cycle time
Order cycle time indicates the amount of time it takes for a customer to place an order and the time it takes to receive that order. This metric gives you exclusive insight into the supply chain processes.
The formula to calculate order cycle time is:
Average Order Cycle Time = (Delivery Date – Order Date) / Total Orders Shipped
15. Sales margin
Sales margin indicates the profit a business makes after inventory is sold. The profit earned reflects the efficiency of a business’s pricing strategy, and employs ways for strategic asset management.
The formula to calculate the sales margin is:
Sales Margin (%) = [(Sales Revenue – Cost of Goods Sold) / Sales Revenue] × 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:
1. 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.
2. 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 placeholders, and poor physical counts can compromise data integrity. In some industries, such as healthcare, medical inventory tracking is crucial.
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, miss shipments or returns and distort key indicators.
3. 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 businesses with multiple locations, each store manager knows their 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.
Simplify your inventory management process
Is it becoming difficult to manage your inventory? Guess what? It doesn’t have to be complicated with the right asset tracking tool, you can streamline your business operations and supply chain processes, minimize errors, and gain full access to the inventory stock available in the warehouse.
Using a simple cloud-based inventory management solution that is designed to help businesses like yours optimize their inventory processes. With the help of asset tracking, you can:
1. Consolidate data
Managers can centralize all inventory-based data in a single place, restrict access to users, and keep track of all locations.
2. Barcode tagging
Managers can assign unique location barcodes and RFID tags to all inventory for accurate tracking.
3. Stay updated with inventory levels
Track the real-time stock using the barcodes, RFID, and QR codes. Get notified with instant alerts in case stock is running low. You will be able to keep inventory levels maintained at all times.
4. Automate the purchase order process
Place orders for new inventory easily by creating detailed purchase orders. Record essential inventory information, and attach guidelines to ensure the procured inventory is of the right quality. Automate the purchase order approval process by enabling managers to review each purchase request before procurement. This will help you to reduce ordering errors as well.
5. Customize reports
You can easily generate and customize the reports to analyze the turnover rate, stock levels, and more to make informed decisions.
6. Manage dashboards
Take a look at the displayed KPIs, reports, and real-time insights on the customized user-friendly dashboard to track stock levels.
7. Integrate with other systems
You can integrate the inventory tracking tool with other platforms such as Zendesk and Jira to ensure streamlined communication. Improve the ticket resolution time by responding to urgent requests promptly. Track relevant inventory KPIs to streamline data management.
8. Warehouse management
With an inventory management and tracking tool, you can easily manage the inventory at multiple locations, track it, and ensure optimal stock levels. Check-in/out items at the warehouse using the mobile application to easily scan incoming and outgoing inventory, and maintain an accurate count.
Inventory management for small and medium businesses
Unreliable supply chains can cause hindrances for small and medium businesses. With proper inventory management, you can forecast the inventory demand and generate revenue as desired.
To make this easier, you can use inventory tracking tools, such as EZOfficeInventory, that allow you to track all your inventory, centralize data, and get real-time insights so that you can view the important inventory KPIs to track. You can plan better ways to make use of the leftover stock, and when to order new stock before all items are sold out.
