Inventory Management Continued: What Inventory KPIs Should You be Measuring?

Like most manufacturing companies, when it comes to inventory management, yours likely has several goals and benchmarks you’re striving to achieve. Looking at Key Performance Indicators (KPIs) is the best way for you to know whether your company is working towards meeting those goals or heading in the opposite direction. 

Before jumping into some of the KPIs you can measure, let’s look at how you can make sure you’re picking the right ones in the first place. First and foremost, it is good to note that every company will have different goals and targets depending on factors like the industry, company size, location, etc.  

The metrics you choose to measure should directly correlate with company goals. 

How to Pick the Right Metrics to Measure 

Defining the appropriate metrics and analytics is key because if your company measures and incentivizes the wrong behaviours, performance will take a hit. 

SPS Commerce has outlined the following four strategies for choosing the right KPIs: 

  1. Understand company goals: Are you looking to increase sales, reduce waste, increase production time?  
  1. Make sure KPIs correlate with wider goals: Your KPIs must reflect your business’s goals so you can get an accurate look at whether you’re making progress. 
  1. Make SMART targets: Are your KPIs SMART – are they specific, measurable, attainable, relevant, and time-based?  
  1. Consider employees: Does your team have the right tools to track the metrics? As SPS Commerce notes, “Making sure the team is skilled in using the data and tools effectively, consistently, and confidently will lead to greater success.” 

Now that you have analyzed the company goals, have a good understanding of the targets you’re trying to reach, consider employees, and who will be responsible for tracking KPIs, here are some KPIs you may consider measuring. 

According to Silvon, there are three different types of KPIs.  

Inventory KPI Examples: Sales KPIs 

Sales KPIs look at the impact customer actions can have on your inventory. These KPIs can include: 

Available to Promise (ATP): “The uncommitted portion of a company’s inventory and planned production maintained in the master schedule to support customer orders.” 

Gross Margin Return on Investment (GMROI): The ratio between how much you have made versus how much you have spent on inventory over a particular period.  

Days On-Hand: “Shows how many days, on average, it takes a company to sell its inventory. The lower this number is, the better because it results in lower carrying costs and less cash tied up in inventory.” 

Sell Through Rate: How much inventory was sold within a certain period. According to Silvon, the average rate can range from 40% to 80% but anything above 80% is ideal.  

Backorder Rate: “An effective way to monitor goods or items that can’t be filled at the time a customer confirms or places an order. By using this metric to your advantage, you can set a definitive fill rate target and track your progress over a weekly, monthly, or annual basis.” 

Laptop with software display data

Inventory KPI Examples: Receiving KPIs 

Receiving KPIs, as the name suggests, are helpful when you’re dealing with inventory immediately. They can also be referred to as warehouse KPIs and can include the following. 

Time to Receive: How quickly a company brings in and gets ready to sell new inventory. 

Put Away Time: How long or quickly it takes for a company to store inventory.  

Inventory KPI Examples: Operational KPIs 

The last type of KPI we’re going to look at is operational KPIs. According to Silvon, “Operational KPIs are used in different industries to track organizational processes, improve efficiency and help businesses better understand the insights provided by KPI metrics.” 

Here are a few metrics that fall under operational KPIs. 

Dead Stock: Inventory that can no longer be sold.   

Inventory Shrinkage: “The amount of inventory a company should have on-hand but cannot account for, usually resulting from theft, damage, miscounts or fraud.” 

Lead Time: How quickly or long it takes for a customer to receive a product they’ve ordered.  

Lost Sales Ratio: “The number of days a specific product is out of stock compared to the expected rate of sales for that product. It indicates when a company runs too lean on its inventory.” 

Order Status: As its name suggests, this refers to the real-time status of an order and whether the order is shipped, on hold or on backorder, etc. 

Reorder Point: “The reorder point, also known as ROP, is the inventory level at which an order is triggered to replenish the inventory stock. The reorder point KPI generally connects the following metrics: sell through, lead time, and level of safety stock.” 

Safety Stock: Inventory or stock kept on hand to reduce the risk of limited inventory due to several factors including fluctuations in supply and demand, customer buying trends, etc.  

Service Level: “The percentage of customers who do not experience stock-outs. You can use this metric to balance excess inventory costs with costs related to not having enough inventory to fulfill orders.” 

Stock-Outs: Refers to items that are not available when a customer places an order. 

For more KPI metrics visit Measuring and Managing Inventory: Everything You Need to Know.  

While there is seemingly and endless of KPIs to pick from it is important that you do not pick too many. Trying monitor and track everything will not be feasible and will likely lead to information burnout. SPS Commerce notes that an ideal number is 3 – 4 metrics that can be regularly measured.  

Tracking and Analyzing Metrics Made Easy 

You are not alone if you’re feeling overwhelmed with trying to decide what metrics to track and how to do it. Luckily, our platform at The Owl Solutions can help. 

Connect with us today to learn more about how we can help you with choosing the right metrics, getting curated metrics for inventory performance, goal setting and comparisons, and industry benchmarking.