13 Critical Inventory Management KPIs You've Got to Monitor

KPIs (Key Performance Indicators) are the business equivalent of blood work results from your annual physical. Regardless of how good things might feel, KPIs will tell you where they truly stand - what your company is doing right, what could use some improvement, and what needs immediate attention.

In retail eCommerce, KPIs related to inventory management can provide deep insights into many other aspects of operations. From current sales and future demand to warehouse performance and opportunity costs, your inventory holds a great deal of useful, actionable information.

At SkuNexus, inventory management is a crucial component of the software solutions we build. Consulting with clients across a broad array of retail sectors, we continually see the importance of inventory optimization to any brand looking to grow and scale its business.

We know that the number of metrics available can be overwhelming, so we are providing here what we consider the 13 most important inventory management KPIs. Armed with this data, merchants can see where work is required, adjust processes as needed, and monitor results to ensure success going forward.

SkuNexus inventory management software helps improve sales KPIs.

Inventory KPIs: Sales

Inventory sales KPIs help give powerful context to gross sales data. By filtering sales through these inventory formulas, a better, more nuanced measurement of sales performance is yielded along with insights about a host of other business activities.

Stock to Sales Ratio
Definition: Ratio of stock available for sale to stock that has been sold.
Formula: Units Available/Units Sold
— This is a vital metric for determining and maintaining optimum inventory levels. Too much will result in increased holding costs: warehousing (rent, utilities, salaries), opportunity cost, and other costs related to things like depreciation, perishability, shrinkage, and insurance. Too little can mean stockouts which will result in both lost sales and lost customers. 

Side Note: Stockout Cost = (Days out of stock x Average units sold per day x Price per unit) + Cost of consequence.

Sell-Through Rate (STR)
Definition: Comparison between inventory amount sold and amount received from manufacturer/supplier, usually measured monthly.
Formula: (# Units Sold/# Units Received) x100
— The STR helps gauge accuracy of demand forecasting, identify popular products, measure supply chain efficiency, and mitigate storage costs. It is a powerful KPI for insights about what your customers want and for minimizing overstocks. An ideal STR is generally considered to be 80 and up.

SkuNexus inventory management software helps improve sales KPIs.

Inventory Turnover Rate (ITR)
Definition: Ratio of how frequently inventory sold and was replenished during a specific time period.
Formula: Sales/Average Inventory OR Cost of Goods Sold/Average Inventory (Numbers represent $ amounts)
— Inventory Turnover Rate will help inform decisions about stock levels and/or pricing. The two methods of computing ITR are not equivalent, however, and this must be understood. The COGS ratio is considered more accurate as it does not incorporate sales markups on top of cost. Regardless of method used, a low ITR can denote poor sales or excess inventory whereas a high ITR, while preferable if due to strong sales, can also mean pricing levels are too low and need adjustment.

Weeks On-Hand 
Definition: Average amount of time it takes to sell inventory.
Formula: Weeks in Accounting Period/Inventory Turnover Rate
— Considering how much capital is invested in inventory, this KPI is an excellent measure of not only how smartly a company is allocating resources, but also of its overall financial position. A low weeks on-hand number means efficient product movement, extremely low carrying costs, and improved cash flow. 

Backorder Rate
Definition: Percentage of customer orders a company cannot immediately fulfill from inventory. 
Formula: (# Orders Delayed due to Backorder/Total # of Orders) x100
— Since backorders are viewed both positively and negatively depending on the scenario, this KPI can reflect a broad range of situations. On the plus side, a high backorder rate may mean overwhelming demand, and a low backorder rate can signify excellent demand planning. In contrast, a high backorder rate can also mean poor demand planning while a low rate suggests lethargic demand. As backorders may also be used by brands to test demand for new products, this KPI can serve as a superb market research tool.

Days Sales in Inventory (DSI)
Definition: Time it takes to turn inventory into sales.
Formula: Days in Accounting Period/Inventory Turnover Rate
— A further distillation of the Weeks On-Hand KPI, this liquidity reading is more meaningful for merchants selling lower-priced, high-volume items. A high number may signify inefficient movement, particularly if no secondary contributing factors are identified. However, in situations where projected supply is forecast to be diminished, a company might accept a high DSI in the near term, hold its inventory, and then raise prices to meet future demand.

SkuNexus inventory and warehouse management provide control over backend operations.

Inventory KPIs: Receiving

Receiving inventory is of course a fundamental part of warehouse operations, but due to the stark contrast between these processes and those of fulfillment, the KPIs are generally discussed separately. These numbers are also used to assess warehouse management performance.

Time to Receive
Definition: Measures process efficiency of stock reception.
Formula: Total time needed for inbound stock to be accepted, validated, added into inventory records, and made ready for putaway.
— Any delays or breakdowns during receiving can create further backlog as inventory moves through the warehouse. Pinpointing, and addressing, deficiencies here will save time, reduce costs, and improve inventory flow. For reporting purposes, this KPI should be recorded within your warehouse management system (WMS).

Putaway Time
Definition: Total time needed to complete each putaway task.
Formula: Time taken to complete process of placing received inventory into storage, ready for order fulfillment.
— An extension of Time to Receive, this KPI indicates efficient (or inefficient) warehouse processes. Putaway Time can be optimized via directed putaway, wherein the WMS provides clear instructions re: exactly where goods are to be stored the moment they enter the facility.

SkuNexus management software solutions solve inventory management problems.

Inventory KPIs: Operations

These KPIs are measurements of how the business is performing and encompass a wide range of very different data points.

On-Time Orders
Definition: Percentage of orders customers receive on time.
Formula: (# of Orders Delivered On Time/Total # of Orders) x100
— With adjustments necessary for any outlier shipping delays, On-Time Orders can be viewed as a holistic KPI for your entire backend fulfillment process. Meaning, it is the culmination of everything you are doing, right or wrong. Efficient, optimized operations will result in a high percentage of on-time deliveries, and poorly-executed receiving/putaway/fulfillment will have similar outcomes. 

Shrinkage
Definition: Percentage of recorded inventory not in actual inventory.    
Formula: [(Cost of Recorded Inventory – Cost of Physical Inventory)/Cost of Recorded Inventory) x100
— Shrinkage measures inventory that cannot be accounted for. The “reasonable” causes (accidental damage, miscounting) still indicate potential errors in processes that must be corrected, while theft and/or fraud are among the most serious issues a merchant can face and must be investigated and rectified ASAP.

Rate of Returns
Definition: Percentage of shipped items returned to merchant.
Formula: [(# of Items Returned)/(Total # of Items Shipped)] x100
— While returns may be a fact-of-life for any eCommerce enterprise, mitigating them is crucial to reducing the myriad of associated costs. This KPI must be analyzed for potential patterns to determine why items are being returned.

Cost of Carry
Definition: Percentage of total inventory value a company pays to maintain inventory in storage.
Formula: [(Inventory Service Costs + Inventory Risk Costs + Capital Cost + Storage Cost)/Total Inventory Value] x100
— Another broad measure of inventory management, this KPI shows how efficiently goods are moving and can reflect the accuracy of your demand projections, the strength of marketing campaigns, and even the quality of warehouse layouts. High carrying costs are generally the result of multiple factors and, as such, can be targeted and lowered with a careful top-to-bottom analysis of all inputs.

Perfect Order Rate
Definition: Measurement of how many orders ship without any issues whatsoever
Formula: [(# orders delivered on time / # orders) x (# orders complete / # orders) x (# orders damage free / # orders) x (# orders with accurate documentation / # orders)] x 100
— An aspirational KPI for any merchant whose fulfillment operations are well-optimized. This metric reflects a disciplined and focused workforce, sound management, efficient processes, and, ultimately, satisfied customers.

At SkuNexus, our goals are aligned with our clients - we work to design management software solutions so that all their KPIs, regardless of category, are moving in the right direction. 

If you would like to learn more about SkuNexus and what we can do for your eCommerce business, please schedule a demo.

And, if you would like to read more of our ongoing insights, please subscribe to our blog.

Editor's Note: This post was originally published in 2018 and has been completely revamped and updated for accuracy and comprehensiveness.

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