Inventory KPI: What It Is and the Most Important KPIs to Measure

Inventory KPIs help you understand your business performance so you can make better decisions.

Do you want to know how to grow your business efficiently?

Develop inventory KPIs.

With them, you’ll have the data you need to make smart, strategic decisions for your business.

There are many KPIs you can use to measure your performance, and we’ll cover a few that can help you keep costs low and profits high.

But first, let’s define an inventory KPI.

What is an Inventory KPI?

A Key Performance Indicator (KPI) is a measurement of your performance within a particular area toward a specific goal.

KPIs help to eliminate guesswork by giving you clear milestones to hit every week, quarter, or year.

KPIs can be static:

No new accidents within the last 30 days!

Or, KPIs can be milestones toward a larger goal:

Increase revenue by 25{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} every quarter.

Inventory KPIs can help you maintain your current level of growth, or it can help you scale up your business to the next level.

4 Essential Inventory KPIs

It can be tough deciding on what needs to be measured or what goals need to be met, especially if you’re just beginning to gather this data or you’ve started a new business.

Here are 4 essential inventory KPIs to focus on, whether you’re a new business or not.

Inventory Carrying Costs

Any warehouse that holds inventory has a variety of holding costs, or carrying costs:

• Labor
• Rent
• Utilities
• Storage
• Security
• Theft
• Equipment
• Etc.

A warehouse manager needs to quantify all of the specific costs in their facility into concrete dollar amounts in order to create an accurate inventory KPI for carrying costs.

Once that inventory KPI is created, you can develop strategies for optimizing your carrying costs:

• Work on inventory reduction
• Test out Just-in-time inventory (JTI)
• Consider using consignment inventory
• Calculate an appropriate amount of safety stock inventory
• Use an accurate reorder point formula

Inventory Write-Offs and Write-Downs

An inventory write-off describes goods that are no longer valuable and can’t be sold. This could happen if your goods become damaged, stolen, or obsolete in the market.

An inventory write-down describes goods that have diminished in value, but can still be sold for a marginal profit, at cost, or at a minimal loss.

If you have large, recurring write-downs and write-offs, you’re probably suffering from poor inventory management.

Purchasing duplicate inventory, mishandling stock, incorrect calculations can all lead to excessive write-downs and write-offs.

Your KPI in this area will vary depending on your industry, holiday seasons, and size of your company, but you should do everything to keep these numbers as low as possible.

Rate of Inventory Turnover

Your rate of inventory turnover is a key metric to understand if you want to optimize your cash flow, working capital, and inventory costs.

By calculating your rate of inventory turnover, you’ll have a better grasp on the market demand for your products, on the amount of obsolete stock you may be carrying, and what steps you need to take to sell or stock more inventory, depending on your turnover rate.

Here is the calculation for rate of inventory turnover:

Cost of Goods Sold (COGS) divided by Average Inventory.

Compare your number to the industry average to know if your inventory turnover KPI is in the correct range.

Pick, Pack, and Ship

Customer satisfaction is the ultimate measure of your business’s performance.

The faster and more efficiently you can deliver what your customer wants, the happier they’ll be, and the more your business will grow.

There are 3 major ways to measure your pick, pack, and ship effectiveness:

1. Cycle Time
2. Order Status and Tracking
3. Fill Rate

Let’s look at each one in more detail.

Cycle Time

Cycle time is the time it takes for you prepare and deliver the goods bought by your customer.

The formula for measuring cycle time is:

The delivery date minus the date the order was placed.

You should measure the cycle time of every order, from retail to wholesale customers.

The smaller your cycle time – meaning the faster you prepare and deliver goods – the better your reputation as a reliable and quick company, which could give you a substantial competitive advantage in your market.

Order Status and Tracking

Order status and tracking is a measurement of the state and place of your goods.

Tracking how your employees handle orders, handle goods, and deliver goods can help you cut down on mistakes, catch thieves, prevent damaged goods from reaching customers, and improve customer service.

Providing customers with tracking information will make your company seem transparent and honest, increasing trust and customer loyalty.

Fill Rate

The item fill rate, also known as the demand satisfaction rate, is how much of the customer’s order you could fulfill using the stock you currently have.

If your customer orders 40 widgets, and you only have 20 on hand, your item fill rate is 50{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3}.

You can increase your item fill rate by improving your customer demand forecasting, and ordering the right amount of stock to fulfill future orders.

The Tool You Need to Achieve Any Inventory KPI

Achieving any inventory KPI requires an accurate stocktaking process, real-time inventory reports, and the ability to manage multiple warehouses simultaneously.

You’re going to have a hard time reaching your goals without a system that delivers reliable data, tracks and records all of your inventory coming and going, and can scale alongside your growing business.

If you’re looking for a tool that can do all of this for you and help you meet your inventory KPIs with ease, then we have the cloud-based inventory management software you need.