- Plans & Pricing
What is it that is making your online store a success? Which strategies are contributing to the increase in your sales and revenue?
Answers to these questions and more are essential to understanding all the aspects of your business and its continued growth.
But to understand those aspects, you have to have some way of measuring the performance of different areas of your business. To do that, you need to understand how to monitor the right key performance indicators (KPIs).
There are numerous KPIs that you can track in different areas of your business. For the purposes of this post, we’ll look at the important KPIs that relate to inventory management, and how to measure them.
To make it easy, we’ve broken them down into three sections: sales, receiving, and operational KPIs. Let’s take a look at each section individually in this inventory KPI list.
Within each section, we will define the specific, standard inventory KPI, tell you how it’s calculated (inventory KPI formulas), and what it each metric tells you about your stock, processes, or sales. The third is the most important, since data is useless without an actionable understanding of it.
These KPIs are influenced by your customers’ actions and they will let you know how your inventory is affected.
Stock to Sales Ratio
Definition: The ratio of stock available for sale versus the stock that has been sold.
Formula: Units available ÷ Units sold
What it means: The stock to sales ratio will help you keep your inventory at optimum levels. If you have too much inventory, you are tying up capital that could be better spent elsewhere. Conversely, if you have too little stock, you may run out, which is the number one thing not to do for retailers.
Sell through Rate
Definition: The percentage of units sold during a specific time period.
Formula: Units sold ÷ (Units sold + On-hand inventory)
What it means: Your sell through rate tells you the percentage of your available inventory that actually sold. When the rate is too low, it means you have too many units on-hand (you overstocked), or you priced too high. When the rate is too high, it may mean that you have too little inventory, or you priced too low.
Definition: The average amount of time it takes to sell the inventory it holds.
Formula: Average Inventory ÷ Cost of Goods Sold x 52
What it means: This KPI tells you how your efficiently your inventory is moving. When the weeks on-hand is high, it means that your inventory is not moving efficiently, which results in a lower profitability due to storage fees and tied up capital. When the weeks of inventory on-hand is low, it means that your inventory is moving quickly and efficiently.
Inventory Turnover Rate
Definition: A ratio that shows how many times inventory was sold and replaced during a specific time period.
Formula: There are two calculations that will show your Inventory Turnover Rate:
Sales ÷ Average Inventory or Cost of Goods Sold ÷ Average Inventory
What it means: This KPI tells you how fast you are selling your inventory. It’s often measured against the turnover rate of industry averages. When your turnover rate is low, it indicates you have weak sales and excess inventory. A higher ratio shows that you have either strong sales or it could indicate that you are giving customers large discounts.
Back Order Rate
Definition: Shows how well you stock products that customers demand.
Formula: (# of Customer Orders Delayed due to Backorder ÷ Total # of Customer Orders Placed) x 100
What it means: This KPI indicates whether or not your inventory is meeting customer demands. A higher back order rate tells you that your forecasting is inefficient or your inventory management needs work. A lower back order rate means that you are experiencing slow order cycle times and that you run the risk of customers being dissatisfied.
Days to Sell Inventory
Definition: How long it takes to turn your inventory into sales.
Formula: (Average Inventory ÷ Cost of Sales) x 365
What it means: This KPI tells you the time period that it takes for your inventory to convert into sales. When the number is high, it may indicate that your inventory movement is inefficient. However, the optimum days to sell inventory varies depending on the industry you’re in. If you sell large ticket items, they typically move slower than lower-priced products.
These KPIs are tied to the receiving of stock and may overlap with warehouse KPIs.
Time to Receive
Definition: How efficient your process for receiving stock is.
Formula: The time taken for received stock to be validated, added into inventory records, and be ready to put away.
What it means: This KPI tells you how efficient your receiving process is. Knowing the rate at which your stock is received and becomes ready to sell will help you identify any deficiencies that are occurring in your warehouse, so they can be addressed quickly.
Put Away Time
Definition: Total time taken during the entire process of each put-away task.
Formula: The time taken for received inventory to be put away and ready to pick.
What it means: This KPI tells you how effective your put-away process is. When your put-away process is efficient, your lead time is significantly lower.
These KPIs measure the effectiveness of operational costs, of which a large part is labor costs.
On Time Orders
Definition: The percentage of the time that customers receive their orders on time.
Formula: # of Orders Delivered On Time ÷ Total # of Orders
What it means: This KPI indicates your performance in getting customers their orders within the time that you have specified. The higher the number the better. When your on time order percentage is low, you will likely experience customer service issues and dissatisfied customers.
Definition: The percentage of inventory that is listed in records but is not physically in the actual inventory.
Formula: (Cost of Recorded Inventory – Cost of Physical Inventory) ÷ Cost of Recorded Inventory
What it means: This KPI, when excessive, may mean that you have a problem with inventory damage, theft, miscounting, or supplier fraud (when a supplier bills for more products than it sends), and that a thorough investigation should be performed.
Definition: The amount of inventory on-hand during a specific period of time.
Formula: (Beginning Inventory + Ending Inventory) ÷ 2
What it means: This KPI tells you how much stock you have on average during a specific time frame. Your average inventory shouldn’t have unexplained drops or spikes. The aim is to keep your inventory flow in and out, in a relatively consistent manner.
Rate of Returns
Definition: The percentage of shipped items that are returned to you.
Formula: (# of Items Returned) ÷ (Total # of Items Shipped)
What it means: This KPI tells you how much of your inventory is being returned to you, allowing you to identify any patterns of issues (defective or malfunctioning products, inferior quality products, etc.).
Cost of Carrying Inventory
Definition: The percentage representing cents per dollar that is spent on inventory overhead each year.
Formula: Carrying Costs ÷ Overall Cost
What it means: This KPI tells you how much you will spend (as a percentage) to hold and store your inventory annually. When you need to reduce your cost of carrying inventory, it’s important to reduce your inventory by eliminating obsolete, slow-moving, or dead stock inventory.
Knowing which inventory KPIs to monitor and understanding what they mean is critical to effectively managing your inventory.
The above gives you a good start on which inventory management metrics you should be looking at, but ultimately, you need to determine which ones will make your operations more efficient, while keeping your customers happy.
If you are not currently documenting and tracking your inventory KPIs regularly, your competition already has the jump on you.
Start monitoring ASAP, and if you find that some of your metrics are not where they should be, schedule a demo of our order management system to track your stock across your organization in a single inventory management KPI dashboard.
Our groundbreaking open source order management software will blow your mind.
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