Strategic inventory control: 7 metrics that matter

by | Jun 4, 2024 | Data Management, Inventory Management, Retailers, Suppliers

By setting key performance indicators (KPIs) to monitor inventory management, businesses are empowered to make better strategic decisions. Tracking the right metrics enables companies to improve cash flow, reduce operating costs and offer an exceptional customer experience.

But let’s face it: If you’re new to measuring inventory performance, the task of selecting which metrics to focus on can be a bit daunting.

The metrics you choose to track will depend on the kind of business you run and the growth you’re looking to achieve. A great place to start is by identifying your key business functions and recognizing how each one brings value to customers.

What to consider when selecting inventory metrics

Before you determine the KPIs you want to measure, remember that your selection will have a significant impact on your operations. Here are some important considerations to keep in mind.

  • Consider your teams and use cases: Using the right inventory metrics can affect how everyone does their job. So, be sure to choose metrics that will provide the right data for your teams’ unique use cases. At the same time, seek to use KPIs across departments to foster collaboration and track common company goals. That way, everyone will have what they need for their respective jobs while still working towards the same goals.
  • Choose KPIs based on value, not effort: While capturing metrics around existing efficiencies may be easier, it’s important to gather metrics that reflect increases in effectiveness. Even if they prove more challenging to track, these metrics genuinely add value to your business, as they indicate improvements in your operations and strategic decision-making.
  • Make your KPIs SMART: Don’t settle for metrics that are too broad in scope because they won’t give you actionable insights. Your KPIs should be Specific, Measurable, Achievable, Relevant and Timely.
  • Beware of vanity metrics: While making a specific department or process appear high-performing, these metrics don’t deliver valuable insights into the effectiveness of your inventory management performance.
  • Use the right tools: To manage your metrics effectively, select inventory software with a user-friendly and customizable dashboard. Track and communicate your metrics regularly across the business.

Here are some key inventory management metrics to have on your radar:

1. Demand forecast accuracy

Understanding how your demand forecasts perform against actual demand is essential for closing any gaps. This metric also relates to inventory carrying costs, a key element of inventory management effectiveness. Accurate demand forecasting means you’re less likely to order excess inventory. Increased accuracy will also enable you to respond quickly when it’s necessary to order more stock than usual—and, in the process, grow your business.

2. Perfect order performance

This metric indicates how effectively you deliver customers complete, accurate and damage-free orders. Factors making up a “perfect order” include:

  • The % of orders delivered on time
  • The % of complete orders
  • The % of damage-free orders
  • The % of orders with accurate documentation

Most suppliers achieve a perfect order performance of 90% or higher. With ever-improving manufacturing intelligence, however, perfect order performance is likely to increase further across all production strategies.

3. Customer satisfaction

This metric is often measured in terms of net promoter scores or NPS. Customer satisfaction levels should be evaluated across all channels, and an NPS score should be determined for each separately. This enables companies to check and index customer order-to-delivery times to see if they’re as they should be. There’s a big difference between customer service that’s merely good and offering world-class service to customers.

4. Inventory turnover

This metric measures the number of times inventory is sold and replaced (i.e., “turned over”) in a specific time period. It’s a good measure of overall business efficiency; higher turnover generally means greater efficiency.

However, this doesn’t mean that having a slower turnover is always an indicator of inefficiency. If you sell higher-priced items, they may spend more time on the shelf but still make good profits for your business.

The two approaches generally used for calculating inventory turnover are:

  • Sales by average inventory over a specific period
  • Cost of goods sold (COGS) divided by average inventory over a specific time period

For a more in-depth discussion on inventory turnover, as well as an easy-to-use calculator tool, visit our resource here.

How to interpret inventory turnover metrics

A company with excessive inventory compared to sales can indicate unexpectedly low sales or poor inventory planning. For example, an excess of stock may be built up in anticipation of seasonal selling, or some may be out-of-date. Also, a business’s accounting method can affect how much inventory is reported, skewing results.

When a company sees a low inventory turnover rate, it may indicate that it has a flawed purchasing system and has bought too many goods. It could also mean that stock has been purchased in anticipation of sales that didn’t materialize due to a shift in demand. A high rate of inventory turnover implies that the purchasing function is operating well. However, this could indicate another possibility: the company doesn’t have sufficient cash reserves to maintain normal inventory levels.

5. Out-of-stock rate

“Stock-outs” relate to the frequency of inventory requests without stock availability. This can impact the supply chain and be frustrating for customers who wait until a company restocks their requested items. As such, it can have a big impact on customer loyalty. Causes of out-of-stocks include poor inventory management, machine breakdowns or a break in the replenishment order process.

Calculate the out-of-stock rate by measuring the amount of stock that cannot be supplied based on daily, weekly, monthly or annual sales volume. For example, if 400 customer orders were not fulfilled out of 1000 orders for the month due to no available stock, the percentage would be 40%. If your numbers are anywhere near as high as this, you will inevitably be experiencing large volumes of dissatisfied customers.

6. Order cycle time

Order cycle time (OCT) tracks how quickly you fulfill orders. Sometimes referred to as “lead time,” this metric reflects how well your supply chain, production and fulfillment processes work together. Companies with shorter OCTs are responding better to customer orders, while those with longer lead times may be experiencing customer dissatisfaction and becoming competitively disadvantaged. The more efficient your processes are, the better your OCT will be.

7. Inventory carrying costs

These include the many overhead costs (often hidden) of stocking items in a warehouse. They include:

  • Capital costs—the costs related to investment in buying stock, interest on working capital and opportunity cost of invested money
  • Service costs—including insurance, IT hardware, security and the expense involved in handling goods in a warehouse
  • Storage space—these costs include rent of the warehouse, any mortgages on the property and maintenance costs, including heating,lighting or air conditioning
  • Risk costs—related to the costs of covering items that become obsolete, shrink or lose value while stored

Inventory carrying costs are calculated by totaling the overhead costs and dividing this by the average annual inventory cost. This gives you a percentage, usually ranging from 15 to 20%.

Implementing more efficient warehouse and inventory management processes will improve your carrying cost KPIs.

Getting started

Don’t be intimidated by the list of metrics! Start with inventory turnover, which is relatively easy to track, to gauge your overall inventory health. Add relevant metrics over time to identify improvement opportunities. You can also begin to implement reliable inventory management software to ensure accurate data collection and simplified tracking.

SPS Analytics solutions give you insights to track inventory performance and make key decisions to maximize spending value and avoid waste. Our inventory management services solve all your inventory challenges—helping you gain the data you need to make your KPIs accurate and your goals achievable.

Joy Spiotta