If you ever wanted an in-depth look at a business, all you’d need to do is take a look at its inventory management metrics. In inventory management, inventory metrics and KPIs can tell you right away how a business defines itself, conveying the trends most important to the company.
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Inventory management software allows businesses to more effectively manage their inventory key performance indicators (KPIs) and outline the most valid behaviors for a supply chain management operation quickly and easily.
What This Article Covers
What Are Inventory KPIs?
Inventory KPIs are the details you need to make informed decisions, from monitoring inventory levels and turnover to tracking deliveries and indicating key performance metrics in a business.
Looking to evaluate your supply chain performance at different levels of your business? This is the part where inventory KPIs step in.
While selecting the accurate tools for supply chain KPIs, businesses often use multiple KPIs to assess their supply chain and inventory management performance when they should opt for a SMART approach. This basically means choosing specific, measurable, attainable, relevant and time-based (aka SMART) KPIs to benefit your business.
Key Considerations
Inventory metrics and KPIs help you derive the most effective behaviors, decisions and strategies possible. And this value increases when you have access to shared indicators. Metrics and KPIs that reinforce the silo-based behavior of many manufacturers (such as data and knowledge hoarding) are being replaced by those that reward collaboration.
With valuable inventory metrics and increased collaboration, businesses can improve on-time deliveries, increase customer satisfaction and reduce operating costs.
Selecting the best inventory metrics requires you to begin with careful considerations. Think about the following circumstances before you decide which inventory management KPIs are most important to your business:
- Inventory metrics change how everyone does their job related to the supply chain. Choose carefully.
- It’s easy to choose inventory KPIs that capture efficiency but far more difficult to choose those that reflect an increase in effectiveness. Yet, the latter set is more valuable.
- Resist selecting inventory management metrics and KPIs that are too broad in scope. This is because they won’t quickly deliver insights into the areas you need to take action on.
- Reduce and eliminate metrics that promote competition between departments. Instead, adopt ones that amplify and reward collaboration.
- Stock management metrics must reflect your company’s strategic objectives and reinforce contributions to those goals.
- Beware of vanity metrics that make a specific department or process look good yet don’t deliver any insights into improving the effectiveness of inventory management, supply chains or production.
- When selecting an inventory system, ensure you can configure the inventory KPI dashboard how you’d like. Inventory management metrics can be just as important as selecting the right KPIs.
Primary Benefits
Inventory KPIs play an important role in boosting efficiency and in business growth. They provide data you can analyze and use for improved overall operational performance. Keeping your business objectives in mind, you can take control of the process while establishing an inventory KPI metrics system.
Let us take a quick look at some of the advantages of leveraging inventory KPIs:
- Enhance Customer Relations: Keeping your customers happy is crucial in a customer-centric business. Avoid a mismanaged inventory, where items are either delayed in delivery or out of stock for extended periods, as it leads to disgruntled customers. Track stock quantity and purchase history data so you know how much you need on hand.
- Increase Sales & Revenue: Use sales inventory KPIs and metrics to better analyze the market and compete while optimizing your sales team’s performance. You can compare data based on past summaries and detect patterns of operational inefficiencies.
- Improve Operational & Employee Efficiency: Use employee and operational KPIs to boost performance and productivity. Analyzing inventory KPIs helps you come up with solutions to combat inefficiencies.
- Foster a Financially-viable Business: Inventory metrics and KPIs provide deeper insight into your organization’s processes and profits. Implement inventory management software to collect and track metrics and monitor performance. Use our services to streamline your software selection journey.
Top KPIs & Metrics
The use of inventory KPIs helps translate operational performance into financial reporting across an entire inventory management system to improve production and purchasing processes, cash flow, and profitability. KPIs quickly translate the impact of many diverse business operations activities across inventory and supply chain locations into financial data.
Companies with excellent inventory control systems also rely on frameworks to transform their metrics and KPIs into a common strategic direction. The American Production Control and Inventory Management Society’s (APICS) SCOR Model and Gartner’s Hierarchy of Supply Chain Metrics are two of the most popular frameworks for evaluating inventory management performance as part of broader supply chain networks.
Both are excellent frameworks to rely on when defining inventory metrics that measure supply chain effectiveness and its impact on profitability.
The SCOR model was recently updated to include support for omnichannel inventory management, blockchain inventory management, sustainability and several other major improvements. The Hierarchy of Supply Chain Metrics is a widely-adopted framework globally and is briefly explained by Gartner. The latest edition of the APICS SCOR model is shown below:
Here’s a snippet from the APICS SCOR participant workbook. Source
While there are plenty of KPIs you can track to improve your inventory management, we recommend at least monitoring the ones below.
Based on conversations with manufacturers over the last year, the following are the 10 most effective inventory KPIs and metrics:
1. Demand Forecast Accuracy
An excellent inventory management metric for determining how strong collaboration is in a manufacturing operation, demand forecasting reflects the variation in real or actual demand and what is estimated at the factory level. Inventory metrics for manufacturing can make operations more effective by closing the gaps between forecasted demand and actual demand.
Use demand forecasting to plan inventory and forecast revenue. Source
This inventory metric also contributes directly to reducing inventory carrying costs, a key indicator of inventory management effectiveness. With demand forecasts on hand, you’re less likely to order inventory beyond market demand. Further, demand forecasts can also clue you in on when to order more stock than normal, so you never miss a chance for growth.
2. Customer Satisfaction Levels
Often measured in net promoter scores (NPS), customer satisfaction levels need to be evaluated across all distribution and selling channels. Best-in-class manufacturers measure selling and distribution separately, determining an NPS for each channel. This is to index your customers’ order-to-delivery times and check to see if they’re consistent with what you originally expected.
3. Perfect Order Performance
Perfect order performance quantifies how effectively an organization delivers complete, accurate and damage-free orders to customers on time. The equation that defines the perfect order index (POI) or perfect order performance is: (percent of orders delivered on time) * (percent of orders complete) * (percent of orders damage free) * (percent of orders with accurate documentation) * 100.
DIFOT, or delivered in full and on time, is a critical KPI for purchase orders. But it can be a bit misleading if manufacturers assess it individually instead of using it in the POI formula above. The more configurable products are, the more difficult perfect order performance is to attain. However, the rapid growth of manufacturing intelligence is making perfect order performance more attainable than ever across the spectrum of production strategies.
4. Fill Rate Effectiveness as a Percentage of All Orders
Measuring supply chain collaboration needs to be a priority when selecting inventory metrics and KPIs to manage your operation. Tracking fill rate effectiveness as a percentage of all orders directly reflects how many orders or requests for material from production centers are fulfilled. Taking this metric a step further provides insights into how well production centers are managing inbound inventories to meet customer delivery dates.
5. Gross Contribution Margins by Product, Production Facility and Business Unit
Best-in-class inventory management solutions provide gross contribution margin (GCM) performance levels across several different dimensions of business. GCM is one of the most effective metrics a business can use to evaluate how well collaboration is happening across business units.
If you know the GCM attributable to a given production center, you can track performance and effectiveness levels by location.
6. Order Cycle Time
This inventory metric is also referred to as order lead time, but order cycle time is the more popular iteration. Order cycle time measures the time from when a customer places an order to when they receive their purchased product. This metric reflects how effective your inventory management, supply chain, production and fulfillment operations are.
Order cycle time also sometimes refers to the time between the placement of two back-to-back orders or the successful delivery of two consecutive orders. Regardless of how your company defines these metrics, you should still measure them to get a comprehensive view of your order fulfillment process and where you could improve.
For additional details on this metric and its various names, please see the article, What’s the Difference Between Cycle Time, TAKT Time, and Lead Time?
7. Order Pick, Pack and Ship Accuracy
This measures one of the core functions of an inventory management system. Pick, pack and ship is the process of locating inventory and packing the ordered items for shipment to fulfill customer orders. Customers can be any other department, organization or third-party manufacturers that ordered the shipped products.
Complete your order fulfillment and print a shipping label to keep track of the item. Source
Tracking these inventory management metrics can reveal where your warehouse processes are especially strong and where they are weak. Track more specific pick, pack and ship KPIs such as labor costs per item and per hour in addition to others to understand your warehouse productivity.
8. Inventory Turnover
This inventory metric measures how often a manufacturer’s inventory is sold, replaced or turned over in a specific period. Inventory turnover measures the efficiency of your business overall, with a higher turnover generally meaning greater efficiency. However, while some items you carry may have slower turnovers than others, they may be worth the extra time they spend on the shelf if they are good money-makers for your business.
There are two approaches most often used for calculating inventory turnover. The first is by dividing sales by average inventory for a specific period. The second is to divide the cost of goods sold (COGS) by average inventory for a specific period. Check out this inventory turnover formula article for additional details on this metric.
9. Carrying Cost of Inventory
An invaluable inventory metric for measuring how much of a manufacturer’s working capital is tied up in inventory, this metric provides insights into the hard-to-find costs of handling items. These include put-away, costs of obsolescence and how effective warehouse management systems (WMS) reduce fulfillment costs.
As discussed in the sections above, comparing carrying cost and inventory turnover with your contribution margins is a great way to see which items are worth the extra time in your warehouse.
10. Supplier Quality Index
Measuring how well your suppliers perform is essential to perfecting your business strategies. If you’re not using specific data points to track your suppliers, you can never be sure how much room exists for improvement. Track how often you have to return materials due to mistakes or abnormalities. You could also look into how many orders are received on time.
Choose whichever inventory management metrics are most important to your business. They can be simple like the previous examples or may be complex, so you adhere to governmental regulations.
For instance, medical product manufacturers need to provide a level of visibility to comply with the U.S. Food and Drug Administration mandate, 21 CFR Part 11. This mandate regulates how you should present electronic records to the FDA.
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Bottom Line
Inventory management software can vastly improve your business, but you need a clear idea of exactly what you’ll be tracking with it. While the inventory KPIs listed above are important to keep an eye on, keep tabs on other KPIs critical to your business. You can track these KPIs through a series of tools provided by inventory management suites.
To decide what your next system will require in an organized way, check out our inventory management software requirements template. It includes tools to document all the features and considerations you need to keep in mind when selecting an inventory control system.
Use it to ensure your next application has all the tools needed to track the inventory management KPIs that will lead your company to success. Also, keep track of the recent supply chain trends to get better insight while selecting tools.
Do you agree with our list of the most important inventory management KPIs? What else would you include in the list? Let us know in the comments down below!