KPIs help you understand how effectively your company achieves key business objectives. It serves as an essential indicator for decision-makers to measure the performance of business processes. Using Inventory KPIs is an excellent way for any business to improve inventory performance and increase efficiency.
Top 7 Inventory Management KPIs
Having clear business goals is the first step towards establishing meaningful KPIs, and deciding which KPIs to measure can be tricky, especially if you are starting a new business. We’ve put together 7 essential Inventory KPIs that we think every business must measure.
Stock to Sales Ratio
The Stock to Sales Ratio measures the ratio of available stock to the sold stock. A higher stock to sales ratio indicates that you are carrying too much stock and a lower value means that you are carrying too little. Optimizing your stock to sales ratio will help you maintain your inventory at optimum levels.
Stock to Sales Ratio = Units available ÷ Units sold
Inventory Turnover Rate
Inventory turnover is the rate at which a business replenishes its stock during a given period due to sales. The inventory turnover ratio is a good indicator of the effectiveness of your sales strategy and how well you can generate sales.
Inventory turnover ratio = Cost of Goods Sold / Average Inventory
Backorder Rate
The Backorder Rate KPI is a measure of how well your inventory is meeting demand. A higher backorder rate is an indication of inefficient or inaccurate demand forecasting.
Backorder Rate = Number of Orders Delayed due to Backorder ÷ Total Number of Orders Placed x 100
Average Time to Restock
This KPI tells you how efficient your inventory restocking process is. Measuring the rate at which your stock is received and ready to pick will help you identify bottlenecks in your warehouse and reduce your lead time.
Average Time to Restock = Average time to receive, validate and put away stock
On-Time Orders Ratio
On-Time Orders Ratio, calculated as the ratio of orders shipped on time to the total orders, measures inventory performance and warehouse efficiency. A lower on-time order ratio means that your customers often receive their orders late, increasing the likelihood of returns and reducing brand loyalty.
On-Time Orders Ratio = Number of Orders Delivered On-Time ÷ Total Number of Orders
Rate of Returns
There are various reasons why a customer might return a product. Product returns are inevitable and impact as much as 60% of retailers. The usual culprits include product damages, shipping the wrong item, and not meeting customer expectations. The percentage of shipped items returned is a vital KPI that helps you identify patterns and fix the issues behind product returns.
Rate of Returns = Number of Items Returned ÷ Total Number of Items Shipped
Inventory Carrying Costs
This KPI tells you the percentage of costs to hold and store your inventory annually. Reducing your inventory carrying costs helps you improve inventory performance by eliminating obsolete, slow-moving, or dead inventory.
Inventory Carrying Costs = Carrying Costs ÷ Overall Cost
Wrap up
Achieving any inventory KPI requires accurate inventory management and reporting. Monitoring inventory KPIs becomes much easier with inventory management software that helps you track your inventory and delivers actionable insights into your inventory performance. If you’re looking for software that can do all of this for you and help you meet your inventory KPIs efficiently, then AccelGrid might be just the tool you need.
