Tracking Key Performance Indicators (KPIs) related to inventory isn’t just for warehouses or distribution businesses; it’s crucial for any small business involved in making, selling, or handling physical products. Small manufacturers and retailers rely on accurate inventory data to manage buying, producing, and planning for future production. So, what kind of data should you focus on? Here are nine important inventory management KPIs and some tips on how to use them effectively.
Choosing the right KPIs can transform wasteful practices into efficient processes. With numerous metrics available, deciding which ones to prioritize requires careful consideration. Some KPIs might be more relevant to your business or industry than others. Retailers, for instance, often focus on how quickly items sell, discounts, or profit from inventory (GMROI). Meanwhile, manufacturers might need to pay attention to production times, work-in-progress inventory (WIP), and production capacity usage. A straightforward dashboard or integrating trackable metrics into inventory management software (IMS) or warehouse management software (WMS) can provide a clear overview for managers who choose the most suitable KPIs.
Here are the top nine inventory KPIs for your performance dashboards:
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Average Inventory Level
This KPI calculates the typical amount of stock you hold at any time: (beginning inventory value + ending inventory value) / 2. It provides a straightforward look at your mean stock level over the year, and all businesses aim to keep a stable average inventory. -
Order Lead Time
For small businesses and manufacturers, knowing how long it takes from order placement to product delivery is essential. This measure helps evaluate how efficiently stock is managed and products are delivered. It encompasses everything from production times to material acquisition to product delivery. -
Inventory Turnover Rate
This KPI shows how often you sell out of your inventory over a specific period: number of units sold / average inventory. A higher turnover generally means lower storage costs since products aren’t sitting unused. -
Days Sales of Inventory
This measures how long your stock takes to sell, indicating how long cash is tied up in inventory: time period / inventory turnover. A lower figure signifies quicker turnover, minimizing stock risk and improving demand predictions. -
Carrying Cost of Inventory
Expressed as a percentage, this KPI covers overhead costs of storing inventory, which include capital costs, inventory risk costs, storage space costs, and service costs. The aim is to minimize these expenses while effectively managing necessary costs. -
Backorder Rate
This KPI reflects the percentage of orders that couldn’t be filled immediately: total orders on backorder / total incoming orders. A high rate often indicates supply chain or planning weaknesses. -
Sell-through Rate
This shows the percentage of inventory sold compared to available stock: number of units sold / number of units available for sale. It’s useful for assessing sales performance and adjusting production or restocking amounts. -
Demand Forecast Accuracy
Vital for balancing stock availability, this KPI compares forecasted demand with actual sales: (1 – ((actual demand – forecasted demand) / forecasted demand)) x 100%. A more accurate forecast helps avoid excess inventory. -
Perfect Order Performance, On-time-in-full
This measures order fulfillment efficiency by showing the proportion of orders completed without issues: (total orders – orders with issues) / total orders. Similar to the on-time-in-full KPI, it includes additional factors like defects and processing mistakes.
In summary, inventory management KPIs are crucial for managing stock, costs, and movement. They help small businesses set clear goals and improve operational understanding. These KPIs, often included in performance dashboards, can enhance stock valuation, control inventory better, reduce waste, and cut costs. Aiming to track five to ten KPIs keeps dashboards simple and effective.
Mike Lurye is the Director of Business Development at MRPeasy, a manufacturing resource planning software for small businesses.
