Inventory management software can help you keep accurate inventory records and measure how efficiently you are ordering, storing, and shipping items. Your software is only as useful as the questions you ask it, though. Do you want to know how long goods stick around in your warehouse before being shipped? Have products mysteriously gone missing, contributing to inventory shrinkage? Are there unpredictable changes to the popularity of certain brands, or does demand follow a predictable seasonal cycle? Choosing the right key performance indicators (KPIs) to measure is an important part of warehouse management.
What is a KPI in Inventory Management?
In the context of inventory metrics, a KPI is a measurable outcome related to one or more warehouse processes. For example, you can measure the percentage of orders that ship with perfect accuracy, your inventory turnover ratio, or the percentage of stock in your warehouse that is expired or unusable. Choosing KPIs wisely can improve the productivity and profitability of your company. It can also improve your customer satisfaction score (csat) and net promoter score (NPS) while reducing inventory service costs.
Why KPIs Are Important for Inventory Management
KPIs can give you insights that simply measuring stock levels cannot give you. They can help with demand forecasting and other aspects of long-term planning. Inventory management metrics are useful in informing your forecasts and decisions. It enables you to see the performance of your warehouse operation in terms of percentages instead of raw numbers. Therefore, KPI measurement helps you see trends and patterns that your usual physical inventory reports do not enable you to see. By using KPIs, you can avoid bottlenecks and spikes in demand that would otherwise take you by surprise.
How Do You Measure Inventory Management?
You can measure inventory management based on almost any factor that has an impact on your company’s bottom line. For example, you can measure lead time, dwell time, or the rate of spoilage. You can also measure how long certain items dwell on hand (DOH). This is much more specific than simply measuring inventory levels. It will make a bigger difference regarding opportunities for improvement.
How To Choose The Right Inventory KPIs?
It is a mistake to measure too many KPIs at once. Instead, you should identify your trouble spots or short-term goals and then decide, based on that, which KPIs to measure. For example, you can choose KPIs based on carrying costs, holding costs, or a safety buffer to protect against fluctuations in inventory value. You might even focus on individual SKUs that are experiencing spikes in demand or are prone to spoilage.
Critical Inventory Management KPIs to Improve Inventory Performance
The sky’s the limit with the KPIs you can measure. These are some of the most common KPIs that warehousing companies focus on. These KPIs align well with the business goals and objectives of these companies. Measuring them gives everyone in the organization access to an understanding of the issues that the company is facing. If you do not measure any of these, or in addition to the most common KPIs, you can also develop your own vanity metrics to measure. Each KPI represents the relationships between certain factors as a mathematical formula.
Inventory Turnover Rate
Inventory rate enables you to measure the number of times you sell out of certain SKUs, replacing them with a new shipment of identical items, in a given year. To calculate it, divide the cost of goods sold by the average amount of inventory in your warehouse. It is easier to measure this KPI if you have an automated inventory management system.
Weeks on Hand
Weeks on hand is a dwell on hand (DOH) KPI. It is a measurement of the average number of weeks that a certain item remains in storage in your warehouse from the time it arrives from the suppliers or manufacturer until you fulfill an order and ship it to a customer.
Days on Hand
Days on hand is similar to weeks on hand, except that you measure the warehousing time in days instead of weeks. An example of a scenario where it is useful to measure days on hand instead of weeks is if you are storing perishable food or fragile items that long-term storage can easily damage. Use these metrics when even small delays can be detrimental to your cash flow.
Sell-through Rate
Sell through rate is where you divide the number of units sold by the number of units received and multiply it by 100 to get a percentage. ERP software and other automated tools can help you measure the sell-through rate.
Stock-to-Sales Ratio
To find the stock-to-sales ratio, divide the value of your inventory by the value of your sales. It is informative for your sales team to know this, so they do not order much more merchandise than what goes out for delivery in the form of customer orders.
Backorder Rate
When items are sold out and on back order, this is an opportunity for growth. To calculate it, divide the number of orders experiencing delays by the total number of customer orders. Measuring it can help you avoid the risks of delays that can affect your profit margins.
Rate of Return
To calculate the rate of return on your investment, subtract the initial value from the final value. Then divide this number by the initial value.
Accuracy of Forecast Demand
To calculate this KPI, subtract the amount of inventory you thought you would have in certain areas of the warehouse from the amount you actually have. Then divide the difference by the actual amounts you have, and multiply the quotient by 100.
Product Sales
To find the product sales, figure out your gross sales revenue. Then subtract sales returns, discounts, and allowances.
Cost per Unit
To figure out how much it costs to produce each unit of an item, add up the fixed and variable costs associated with production. Then divide this number by the total number of units.
Revenue per Unit
To calculate this metric, divide the total revenue for a given time period by the total number of units sold during that period.
Gross Margin by Product
To calculate the gross margin by product, subtract the cost of goods sold from the net sales. Divide the difference by the net sales, and then multiply this number by 100.
Gross Margin Return on Investment
The gross margin return on investment is the relationship between the amount of money the company got and the amount of money it invested in the stock.
Inventory Management Best Practices
Whatever kind of merchandise your company stocks, KPIs are useful methods for determining your fill rate, minimizing your operating costs, and otherwise making your warehouse profitable. The best inventory management software suites have dashboards that enable you to survey KPIs and keep track of the ones most immediately relevant to your situation and cash flow. These are some ways to get the most out of measuring KPIs.
Implement Quality Control
Use KPIs as a form of quality control. For example, KPIs can show you how much stock is going to waste and how accurate your physical counts are. The results can be a roadmap to improving your service level.
Be Data-Driven
Data is the best insurance against unexpected financial losses. Data can help you choose which KPIs to measure and solve the problems that the KPIs reveal.
JIT – Just in Time
For best results, don’t just decide which KPIs to measure, but also when to measure them. Some KPIs change quickly, so you miss out on valuable information by only measuring them once per year.
ABC Analysis for Categorization
Some warehouse processes require closer monitoring than others. ABC analysis is warehouse process triage, where you divide the areas or activities of your warehouse into high, medium, and low priority for monitoring.
Key Takeaways
Inventory management software can give you too much information, leaving you with more questions than answers. However, choosing the right KPIs can help you understand what is really going on with your inventory.
Inventory KPIs FAQs
These are some common questions that warehouse managers ask about inventory KPIs.
What Is KPI for Inventory Accuracy?
KPI stands for key performance indicators. For the inventory accuracy KPI, you compare your automated inventory to your physical counts.
What Is the Formula for Inventory KPI?
You can choose from dozens of KPIs related to warehouse inventory. Each takes the form of a different mathematical equation.
What Is KPI for Inventory Turnover?
The KPI for inventory turnover measures the average amount of time a unit of a given item stays in your warehouse from the time it arrives until it ships out.
