10 Crucial Inventory Management KPIs You Should Be Tracking
The consequences of poor inventory management can be devastating, such as missed sales, increased costs, and annoyed customers who end up taking their business elsewhere. Using the proper inventory management KPIs can improve your supply chain processes, cash flow, and profitability.
The only way to outrank your competition is by staying on top of inventory management trends. Keep reading as we discuss ten KPIs that you should be tracking to measure the impact of your inventory management operations. When you understand the data behind them, you can outline the most effective behaviors for your organization.
Top Inventory Management KPIs
Key performance indicators (KPIs) can help you improve production and purchasing processes by translating operational performance into financial reporting across your entire inventory management operation. There are several metrics to consider when it comes to measuring the success of your inventory management efforts.
It’s vital to remember that every company is different, so not all of these KPIs will make sense for you. However, this is a good starting point if you’re not currently defining metrics related to your operational performance.
1. Average Days Sales of Inventory
Average days sales of inventory (DSI) is a KPI that helps you determine the average time you take to turn inventory into sales.
DSI is also referred to as the average age of inventory, days in inventory (DII), days inventory outstanding (DIO), or days inventory. This metric indicates the liquidity of your stock and represents how long your inventory will last. You’ll want to shoot for a lower DSI, as this shows a shorter duration to clear off your shelves. However, the ideal average DSI will vary by industry. The formula for calculating days sales of inventory is (Inventory/Cost of Sales) x 365.
2. Inventory Turnover or Days on Hand
Inventory turnover will tell you how many times your inventory has been sold and replaced in a specified time. If this number is low, you have too few sales or too much stock. You can calculate this number in two ways: cost of goods sold divided by average inventory or sales divided by inventory.
3. Holding Costs
Holding costs refer to those related to holding onto unsold inventory. This figure includes the expense of spoiled and damaged goods as well as labor, space, and insurance. You can designate a reorder point to reduce this cost.
4. Average Inventory
You can use average inventory to calculate the amount of inventory you have in stock during a specified time frame. You’ll want to eliminate spikes or random drops in stock levels and ensure an even flow of inventory in and out, depending on demand and the needs of your business.
The formula to calculate average inventory is (Beginning Inventory + Ending Inventory) / 2.
5. Service Level
The service level is used to calculate the amount of stock you need to avoid stockouts. This KPI expresses a compromise between the cost of a stockout and the cost of inventory.
The stockout KPI shows the number of times you can’t meet demand due to insufficient inventory. A high stockout level can mean missed opportunities, lost sales, and angry customers. Take a good hard look at this number, as it will tell you how effective your company is at purchasing and production.
7. Rate of Return
Returns are inevitable, but you want to track the percentage of products that customers return, which must be restocked. It would help if you also recorded the reason for the return to identify issues in your supply chain. Doing so will help you analyze key trends that could prevent higher return rates in the future.
8. Lead Time
Lead time should be an essential element of your inventory management process. To calculate lead time, add the time it takes your supplier to deliver an order (called the delay) and the time that occurs between your next order (called the reordering delay).
9. Perfect Order Rate
The perfect order rate is the radio of orders that contains the right product, in the correct number, in the right package, delivered to the right place, with the right documentation. This is how many times you get it right 100% of the time. A higher perfect order rate means happier partners and customers.
10. Inventory Accuracy
If you don’t know your inventory inside and out, you’ll end up with poor order accuracy rates, which leads to higher costs. Inventory accuracy means verifying that your internal data is accurate, which will streamline your entire inventory management process.
Make Tracking Inventory Management KPIs Easier With Flxpoint
There is one thing each of these inventory management KPIs has in common: accurate data.
Tracking these KPIs may seem like a daunting task, but it’s necessary to get an authentic view of how well your business is performing. By choosing the appropriate KPIs for your business, you can start to identify patterns that will help you improve your existing inventory management processes and develop new ones.
When you’re ready to transform your business into a more efficient organization, reach out to an expert for more information.
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