Boost Your Success with Inventory Management KPIs
Inventory management is measured through a core set of KPIs designed to make sure retailers have the right stock, in the right quantities, at the right time to increase sales and reduce wasted inventory.
In this article, SPS Commerce explains how identifying and implementing the right KPIs can improve inventory processes and overall profitability.
What is a KPI in inventory management?
Firstly, what is a KPI? A “Key Performance Indicator” is a quantifiable metric used to measure the success of a specific performance objective.
KPIs are useful in ensuring business projects, tasks and campaigns are on track—and whether they are over- or underperforming compared with the objective. Using KPIs effectively can result in increased sales, customer satisfaction and business efficiency.
Inventory management refers to the buying, handling and selling of a company’s stock. This includes how much stock is available, how well it is selling, its price, turnover and demand.
Therefore, an inventory management KPI is any metric used to measure the performance of a business’s stock handling process.
How to measure inventory management
There are various inventory management KPIs, each measuring a specific stock consideration such as how much stock the retailer holds, how fast that stock sells, its value and how long it takes to replenish stock through manufacturers.
Return on investment
Return on investment (ROI) is a calculation of profit gained versus the total cost of the investment. This is an important metric as it helps calculate the profitability of each product and informs critical stock decisions.
Demand forecast accuracy
Demand forecast accuracy continuously measures product sales against forecasted demand. If the demand forecast is over or under actual sales figures, the company is either under or over-buying stock, which can lead to stock supply issues.
Stock-to-sales ratio
Unsurprisingly, this compares the amount of stock held to how much is sold. When the ratio is low, a retailer is not replenishing stock quickly enough to meet demand, putting the company at risk of stock shortages. A high ratio indicates a company is overbuying stock and is at risk of higher carrying costs.
Inventory turnover
This metric tracks how often (over a period determined by analysts) the entire inventory for a particular product is sold. Understanding how often a particular product goes out of stock makes it easier to determine the volume of stock needed per week/month. This helps cut down on excess procurement costs.
Inventory carrying costs
This metric outlines the total expenses of storing unsold products—from employee wages to storing costs and any stock loss from damage. Inventory carrying costs are essential in avoiding stock overflow and holding costs and freeing up storage space for more popular stock. On average, carrying costs constitute 20–30% of a company’s total inventory budget.
Inventory accuracy
Inventory accuracy measures how well the recorded stock levels match actual stock levels. If a product is advertised as in stock when it is not available, it can create challenges in brand reputation and a drop in customer satisfaction. A company must ensure its inventory figures are reliable and strive to reduce human error in the stock-counting process to avoid inaccurate data.
Out-of-stock rate
This metric measures the time a specific product stock takes to run out. It is essential to continuously track this metric as product popularity fluctuates to ensure retailers don’t miss out on potential sales through product droughts.
Out-of-stock rate can also be measured against inventory turnover and average selling days to determine the optimal stock number at any given time.
Sell-through rate
Sell-through rate accounts for the total stock sold compared to the amount the supplier ordered and received. It’s essential to constantly monitor sell-through rate, as unused inventory is sitting in storage, incurring additional carrying costs and taking up space.
Sell-through rate can be calculated by dividing units sold by starting inventory over a determined period. Once those results are obtained, multiply them by a factor of 100.
Average days to sell
Average days to sell is a metric that measures how quickly stock is sold after first reaching the shelves. This information helps inform how often a product needs to be ordered to keep a consistent inventory flow and avoid overbuying stock.
It is also helpful for retailers offering products with short expiration dates. By understanding the average time to sell, retailers can calculate the amount of time stock can remain on shelves before going out-of-date.
Aging inventory
Aging inventory is a KPI that records products past their sell-by date. This is especially important for food and drink retailers. It is essential to ensure expired products are not being sold to avoid safety issues. Out-of-date products that remain unsold also take up storage space and increase carrying costs.
Aging inventory requires an accurate list of which products are in storage, their aging thresholds and when they arrived in storage. The total figure can then be calculated by dividing the inventory costs by the costs of goods sold and multiplying this figure by 365 to account for the total annual projection.
How to choose the right inventory management KPIs
Inventory management KPIs have the potential to drive positive stock decisions to boost profit and minimize wasted spend. However, KPIs must be relevant to the unique products stocked and the challenges faced by the retailer.
Here, we outline how to reap the rewards of targeted inventory management KPIs:
Understand wider company goals: Is the company aiming to increase sales, minimize waste or increase speed to market? Understanding these targets helps to choose appropriate KPIs.
Make sure KPIs align with wider goals: KPIs must then reflect these business goals. For example, focus on sell-through rate to minimize unsold stock or average days to sell, in order to avoid challenges with products being out-of-stock.
Make SMART targets: Is the KPI specific enough and is it measurable? What makes it relevant to a desired goal? What is the target’s time frame? SMART targets (Specific, Measurable, Achievable, Relevant and Timely) are important because they present a clear and measurable framework within which the KPI can be evaluated as successful or unsuccessful—and inform future decisions.
Consider employees: Before rolling out KPI expectations, it is important to do a preparedness check to ensure that the team has access to the right technology and sales data to successfully track the metrics. Making sure the team is skilled in using the data and tools effectively, consistently and confidently will lead to greater success.
Limit the measured KPIs: Too many KPIs can mean information overload. Instead, pick a set of core KPIs (roughly 3 – 4) that can be regularly measured. This will help narrow the aims and objectives of a business.
Example of an inventory management KPI in action
Imagine a coffee brand called “Premi-Coffee”, that is looking to stock the right flavors, at the right time and in the right places—increasing sales and reducing wasted spend through overstocking and holding inventory.
Premi-Coffee is looking to open three additional branches by 2023. In order to achieve this goal, they’ll need to lower stock carrying costs by 5%. They choose a range of SMART KPIs and metrics to review their stocking decisions:
Stock carrying cost reduction rate
This KPI aligns with Premi-Coffee’s goal and provides a SMART goal that is achievable, measurable and clearly defined.
Stock-to-sale ratio and demand forecast accuracy
A demand forecast accuracy with a wide margin and a high stock-to-sale ratio will mean the business is overstocking goods and wasting valuable warehouse floor space.
Turnover rate
The turnover rate lets the company know exactly how far it can go on one shipment of stock. It also suggests how frequently stock would need to come in and be shipped to stores to facilitate warehouse space.
How to track inventory KPIs
Inventory management KPIs can be tracked through a variety of metrics. Think of KPIs as an objective for measurement, and metrics are the tools with which to measure them.
The key to successfully measuring performance is through retail analytics data—accessing real-time and historic sales performance and consumer behavior insights.
This data can not only be used to measure performance against objectives but also to make key inventory decisions to improve business outcomes.
For example, sales, consumer demand supply chain movement and inventory level data can be directly tied into KPIs such as demand forecasting, sell-through rate and inventory accuracy.
SPS Analytics solutions arm you with insights to track inventory performance and make key decisions to maximize spending value and avoid waste.
Our Inventory Management Services solve all your retail inventory challenges – helping you gain the necessary accurate data from supplier communities to make your KPIs accurate and your goals achievable.
We have over 500,000 implemented solutions and a proven 20% inventory reduction potential.
Common mistakes when tracking inventory KPIs
The first mistake many retailers make when tracking inventory KPIs is having too many performance objectives.
Tracking too many data points can pull a business in multiple directions. It’s essential to have just a few core KPIs aimed toward specific company goals.
KPIs should also remain consistent, with little variation in the objectives measured over a short period. Switching KPIs every few weeks can lead to a messy and unfocused business strategy and inaccurate data with such short periods between each changing objective.
Comparing KPIs with those of competitors (especially larger competitors) can also raise challenges. Competitors will have unique KPIs tailored to their specific goals which won’t always align with the aims of the company. Instead, focus on what the business needs to achieve over the next quarter.
Finally, the quality of data is important. Always account for inaccuracy and human error, and take the necessary time to collect precise and accurate data.
