Inventory Management KPIs You Need to Know

Inventory Management KPIs You Need to Know

KPIs (Key Performance Indicators) are a great way to assign importance to departmental tasks that matter to company-wide performance. Various KPIs outline a company's efficiency and the management status of business functions. From logistics to finance, operations, sales, and inventory management, statistics for a specific KPI will provide a numerical depiction of how that department is doing. Every industry has its unique set of metrics that are more relevant to the company's performance. However, there are some inventory management KPIs that could be employed across the industry.

In this article, we outline what those inventory management KPIs are and why they are necessary to keep track of.

Average Inventory

The average count of inventory during two or more specific intervals. The average inventory, which is calculated by dividing the beginning inventory plus the ending inventory by the number of months, helps to show the fluctuation in inventory. Alone, the average inventory number is just a metric but is a necessary value when used to compare with other metrics and formulas.

Average Inventory = (Beginning Inventory + Ending Inventory) / Number of Months
Average Inventory Formulas

Inventory Turnover Ratio

One of the more important statistics for inventory analysis. The ratio shows how frequently an SKU is sold, used, and replaced during a given period.

IT Ratio = Net Sales / Average Inventory Or IT Ratio= COGS / Average Inventory
Inventory Turnover Ratio

A higher ratio is a sign that your company’s sales are strong and you are moving products continuously. A lower ratio usually represents slow sales and longer inventory hold times.

Back Order Rate

Shows the percentage of products that needed to be back ordered due to high demand.

Back Order Rate = (# of Customers Orders Delayed from backorder / Total # of orders) x 100
Back Order Rate

Although having a high rate shows that you have a lot of demand, it could also mean you have insufficient data for forecasting demand planning and needs to be reevaluated. Lower rates usually indicate a slow ordering cycle and the possibility of high customer dissatisfaction.

Days Sales of Inventory (DSI)

The DSI metric is used to determine the efficiency of sales and inventory management processes.

Days Sell in Inventory = (Average Inventory / COGS) x 365
Days Sales of Inventory

The days-to-sell metric gives the time it takes for inventory to sell. Higher numbers tend to implicate inefficiency whereas lower numbers show that inventory is moving faster. Typically companies will want to sell inventory within the next 90 days before it starts costing more money to store them.

Stock to Sales Ratio

Also known as Inventory to Sales Ratio, is a metric that shows how efficiently the company is liquidating its inventory.

Stock to Sales Ratio = Monthly Stock Value / Monthly Sales Value
Stock to Sales Ratio

Stock-to-Sales Ratio shows that to increase inventory turnover, the business must reduce the number of stocks while increasing its sales. A good ratio to aim for is 5-10 for most industries which means that a particular item is sold and replaced roughly five to ten times a year.

Shrinkage (inventory loss/loss rate)

This KPI is used to measure the difference between paper inventory (what is recorded on paper or digitally) and actual inventory.

Shrinkage = (Cost of Recorded Inventory - Cost of Physical Inventory) / Cost of Recorded Inventory

A high number suggests that there might be discrepancies in your inventory due to reasons other than typical causes. For example, if there is an issue with theft or vendor supply fraud, you will have a large difference in shrinkage and should investigate the reasons why. To conduct shrinkage analysis, a physical count of the inventory is required.

Other Metrics

  • Current Quantity: Present capacity of a specific item.
  • Average Quantity: Total stock in and out of products divided by the number of days in a period.
  • Stock-Out Estimate in Days: Average or total amount of days taken for inventory to stock out.
  • Total Stock-In Quantity: Number of items inputted as stock-in for that product during the particular time frame.
  • Average Daily Stock in Quantity: Total amount of stock-ins divided by the number of days in a period.
  • Average Daily Stock-Out Quantity: Total amount of stock-outs divided by the number of days in a period.

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