What Are the 10 Inventory Management KPIs? Why Are the KPIs Important to Track & Monitor in 2023?
Inventory management refers to ordering, storing, and making the best possible use of a company’s inventory. Inventory typically consists of raw materials, components, and finished products. Inventory management optimizes inventory levels (also known as inventory optimization) to avoid situations of overstocking or understocking. Materials Requirement Planning and Just in time inventory systems are critical inventory management systems. A good way to organise inventory is through key performance indicators or inventory management KPIs to be able to understand how your business stacks up based on these predetermined factors. We will be discussing inventory management KPIs in more detail including types, methods, importance, and benefits. Read along.
- What are Inventory Management KPIs?
- 10 Prominent Inventory Management KPIs to Track and Monitor for Your Business in 2023
- 5 Methods to Choose the Best Inventory KPIs for an eCommerce Business
- Why Are Inventory KPIs Important to Measure in eCommerce?
- Inventory Management KPIs FAQs
What are Inventory Management KPIs?
Inventory management KPIs are linked with inventory management supply chain metrics. It consists of various mathematical ratios compared against the established norms, which vary by industry, functional area, and the KPI itself. The variances between the actual and the benchmark ratios identify any disparities and help determine which areas of inventory management need improvement and which processes are successful.
KPIs ideally contribute to achieving the organization’s goals – whether it is growth strategies or profitability targets. KPIs need to be smart, measurable, achievable, relevant, and timely.
10 Prominent Inventory Management KPIs to Track and Monitor for Your Business in 2023
Inventory Turnover Ratio
This inventory KPI ratio is measured as the Cost of Goods Sold divided by the Average Inventory Value. The inventory turnover ratio measures the number of times the inventory is sold, replaced, or turned over in a year which helps businesses determine what products are successful and need constant replenishment and what products are being underutilized and taking up precious space in the warehouse.
Customer Satisfaction Levels
Inventory management KPIs such as this can be measured through customer feedback like when the customer assigns a score between 1-3 or 1-10 for their satisfaction level for the product or service they have purchased from your business. It is a subjective score, based on customers’ individual experiences but it can be analysed to see if there is a recurring theme of positive or negative feedback and measures can be taken to move forward accordingly.
Inventory Accuracy Ratio
This inventory KPI measures the number of items in stock versus the number of items showing as per official inventory records. This fraction is divided by 100. This KPI, Inventory accuracy measures the accuracy of warehouse record-keeping and identifies any disparity in the numbers, which helps companies determine if there has been any damage, breakages, theft, counting error, or any other factor that has caused it
Inventory to Sales Ratio
This inventory-to-sales ratio KPI measures the total value of the inventory and analyses the organisation’s sales performance. When these ratios are high, it is a cause for concern because that means there is overstocking of inventory occurring and there is a danger of the inventory becoming obsolete due to the low sales figure which can lead to increased storage and operational costs.
Suggested Read: Benefits of Inventory Data Analysis
Order Cycle Time
Order cycle time is the time it takes to prepare and place an order with your supplier. The greater the frequency of orders being placed, the lower the stocking costs. For instance, in the case of a Just-in-Time inventory system, inventory is not stocked but repeated orders are placed in small quantities, which results in minimum inventory holding and capital costs.
This inventory KPI measures the effect of out-of-stock SKUs. Even one out-of-stock item can reduce customer satisfaction and have a snowball effect further down the supply chain and can affect repeat sales and lead to poor customer reviews. eCommerce stores should avoid out-of-stock items to the maximum extent possible by implementing an inventory management system where items running low on stock are automatically notified to the management so that they can be replenished instantly.
Carrying Cost of Inventory
There are four components to the carrying cost of inventory:
- Capital costs: These costs are measured as the sum of the following three costs:
- Cost of the stock
- Interest in the working capital finance
- The opportunity cost of the capital invested in inventory
- Inventory service costs: This covers all costs, including costs relating to the inventory management system, hardware depreciation, and inventory handling.
- Storage costs: This relates to the warehouse rent or interest on the mortgage and regular maintenance costs such as lighting, heating, and air conditioning.
- Inventory risk costs: This cost deals with the loss of inventory value due to shrinkage or obsolescence.
Demand Forecast Accuracy
This measures the gap between forecasted demand and actual demand. The more accurate the demand forecast, the higher the efficiency of inventory usage and turnover will be. This will lead to lower stockouts and lower inventory carrying costs. Many enterprises use planning system resources to help get a correct estimation of demand so that the optimum level of inventory can be stored.
Supplier Quality Index
This measures the percentage of the supplier’s total quality cost to the purchase price. This goes beyond just securing a low-cost supplier or getting bulk discounts on orders. It also includes the costs of communicating, transacting, resolving problems, or switching suppliers. A proactive and collaborative approach with suppliers is required to maintain a high level of the supplier quality index which will lead to higher-quality goods being delivered at a faster pace and at cheaper prices.
Labour Cost Per Item
Labour cost per unit itemises and collates all costs related to the labour used in managing inventory. This includes order receipts, packing, and dispatch of items ordered to the end customer. It also includes the costs of labour involved in receiving, unpacking, and storing the various items of inventory from suppliers in the warehouse. A lower labour cost per item means that businesses are running efficiently and effectively.
5 Methods to Choose the Best Inventory KPIs for an eCommerce Business
Refrain from Using Vanity Metrics
Oftentimes, many third-party KPI tools prompt businesses to choose KPIs that showcase their business to be more efficient than it actually is. These inventory KPIs are called vanity metrics because they give businesses a false sense of security that everything is all and well when in reality, it may not be. You should focus on choosing inventory management KPIs that paint an accurate picture of your business operations, even if it exposes a harsher reality because it will enable you to make the necessary improvements to those processes.
Stress on Answering Business-Related Queries
It is important to focus on your business and the strategy it employs. While focusing on choosing inventory management KPIs, you need to opt for ones that will give you clear insights into the actual successes and failures of your business strategies so that you can tweak them and make improvements wherever they are needed which will lead to long-term success.
Always Keep Customers in Mind
While choosing inventory management KPIs to focus on, make sure you choose some customer-centric ones so that you get an idea of where you are going right, in terms of positive feedback, so that you can continue to implement those processes and where you are going wrong, in terms of issues and complaints, so that you can sort them out instantly and avoid other customers having a similar negative experience. This will help your business increase its overall customer satisfaction levels and will lead to more sales and repeat customers.
Track and Analyse Trends
Analysing trends in your past performances through inventory KPIs will give you a vast amount of insights in terms of the success and failures of your business. You can check which products had the highest demand, during which time of the year, and whether you were running a promotion or ad campaign to enable that high demand. Conversely, you can analyse when there were slumps in sales and track the similar factors which may have led to it so you can avoid repeating those same errors in the future. Similarly, you can analyse trends in the market for similar products, price points, and business types.
Don’t Bank on Statistics Alone
While pure statistics and numbers play an important role in ascertaining key points about the success or failure of a business, you need to analyse some inventory management KPIs that focus on the human aspect of your business. While those KPIs are still quantifiable, they help you gauge a more accurate idea of why certain things were successful and others weren’t. Customer behaviour is an underrated trait and businesses that can successfully analyse it will often come out on top.
Why Are Inventory KPIs Important to Measure in eCommerce?
Tracking and measuring inventory management KPIs is important because, without inventory, eCommerce businesses could lose vital customers. Inventory KPIs also ensure that eCommerce businesses know when to restock items and maintain the optimum stock levels.
Prevents Poor Customer Satisfaction
It enables eCommerce stores to provide adequate customer satisfaction. Stock-outs leave a bad taste in the customer’s mouth and negatively affect online feedback and reviews provided.
Avoids Overstocking and Understocking
Inventory KPIs help eCommerce stores maintain optimum inventory levels, avoid high finance costs due to overstocking, and prevent stockout situations. This ensures a healthy cash flow for the business. It also enables planning for Just in time inventory or a drop shipping model, which helps an eCommerce business avoid both excess stock and stockout situations.
Assists in Framing Return Policies
Proper return policies ensure return customers. When eCommerce stores do not have a favorable return policy, it does not bode well for them. It helps businesses in finding the right balance between offering returns and maintaining their profit margins.
Helps in Building the Right Brand Image
Inventory KPIs facilitate efficient inventory management practices, boosting customer satisfaction and leading to positive feedback and reviews which will lead to other customers giving your business a chance because they have a positive perception of it.
Prevents Exploitation From Competitors
Poor inventory management systems and improper inventory KPIs will lead to customers opting for competitors who may offer various incentives such as cheaper rates or free shipping. Measuring inventory KPIs will help businesses keep pace with their competitors to avoid losing out on customers to them.
Inventory management is the very heart of an eCommerce store’s success. Inventory management is a critical task for eCommerce merchants. It’s a good practice to track and control inventory orders, analyse the process and keep up with the usage and storage of readily available stocks. Without proper solutions for inventory management, no eCommerce technology is sufficient. For any eCommerce website, it is a challenge to manage multiple product lines or various product categories of different brands.
Using inventory KPIs to maintain safety stocks to prevent stockout situations, find the right balance of inventory to maintain optimum inventory levels, put together the correct kitting offers, analyse past purchases to predict future patterns in stocking levels and be smart with the storage of various SKUs in the warehouses will help deliver the optimum performance at an organisational level. If you need assistance with finding the right inventory management KPIs for your business and inventory management as a whole, InventoryLogIQ can definitely help.
- Unlocking operational agility
- Avoiding stock-outs & maximising sales
- Preventing inventory bloat