In this article, we explain what inventory metrics are and why they’re important. We will also walk you through our 10-step framework to help you choose the right metrics for your business, with real-world examples. Read on to learn more.
Inventory metrics are quantifiable measures used by businesses to track and optimize their inventory management processes. They provide insights into inventory health, sales performance, and operational efficiency.
Example: Apple monitors its turnover rate and finds that its inventory of iPhone 13s sold and was replaced 5 times during a quarter, indicating high demand and effective stock management.
Inventory metrics are critical quantitative measures used to assess the efficiency and effectiveness of inventory management within an enterprise. Below are some key reasons why:
Optimized Cash Flow: By analyzing inventory metrics, businesses avoid overstocking, freeing up capital. Efficient management promotes healthy cash flow.
Enhanced Customer Satisfaction: Metrics like stockout rates highlight product availability. Stock consistency prevents lost sales and enhances customer satisfaction.
Strategic Decision Making: Metrics provide insights into sales trends and inventory health, guiding informed purchasing and sales decisions.
Reduced Carrying Costs: Monitoring carrying costs reveals the expenses of holding inventory. Lowering these costs benefits the bottom line.
Increased Operational Efficiency: Metrics such as turnover rates identify supply chain inefficiencies, prompting corrective actions.
Risk Mitigation: Inventory metrics detect issues like obsolete stock. Early detection fosters measures to reduce risks.
While the fundamental metrics have remained largely consistent over the years, their relevance and priority may shift based on current business trends and challenges.
Here are some important inventory metrics to monitor:
This metric measures how often a company's inventory is sold and replaced during a specific period. A higher turnover indicates efficient inventory management and sales, while a lower turnover might suggest overstocking or sluggish sales.
Formula: Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory
DSI calculates the average number of days it takes for a product to sell after it's been received into inventory. A rising DSI might indicate slow-moving stock or potential obsolescence, which businesses need to be particularly wary of in fast-paced markets.
Formula: DSI = Number of Days in Period / Inventory Turnover
Given the increasing emphasis on on-demand delivery and customer expectations for fast shipping, monitoring stockouts is crucial. This metric assesses the frequency with which items are out of stock, potentially leading to missed sales opportunities and decreased customer satisfaction.
Formula: Stockout Rate = (Number of Stockouts / Total Orders) x 100
As product life cycles shorten and consumer preferences shift rapidly, companies need to be vigilant about stock that's becoming obsolete or is in excess. This metric tracks items that aren't moving and may require markdowns, promotions, or even disposal.
Note: There is no standardized formula, but it's often based on benchmarks set from historical data.
This comprehensive metric quantifies the total cost of holding inventory. It includes storage costs, insurance, potential obsolescence, and even the opportunity cost of capital tied up in inventory. In 2023, as global supply chains face disruptions and uncertainties, understanding and optimizing these costs will be vital.
Formula: Carrying Cost = Average Inventory Value x Carrying Cost Percentage
With the prominence of eCommerce and global supply chains, understanding the time it takes from placing an order to receiving it becomes crucial. Longer lead times can result in increased safety stock levels and potential stockouts.
There is no specific formula, but it’s often calculated as the time between order placement and receipt.
Advanced technologies, like AI and machine learning, are increasingly being integrated into inventory management systems. As a result, businesses can forecast demand with greater precision. Monitoring the accuracy of these forecasts ensures that inventory levels are optimized based on real-time data and trends.
Formula: Accuracy = (Actual Demand - Forecasted Demand) / Actual Demand x 100
Choosing the right inventory metrics is essential for efficient inventory management. Here's our simple step-by-step framework to help you make the best choices:
Start by understanding your primary business goals. Are you aiming for quick sales turnover, minimizing stockouts, reducing carrying costs, or ensuring product freshness? Your objectives will influence which metrics to prioritize.
Example: Apple aims to release a new iPhone annually. Monitoring turnover rates ensures they deplete older models' stock before launching a new device.
For perishable goods, metrics like shelf life and sell-through rate might be more relevant. For high-value items with longer shelf lives, consider metrics related to carrying costs and turnover rate.
Example: Apple aims to release a new iPhone annually. Monitoring turnover rates ensures they deplete older models' stock before launching a new device.
If you operate through multiple sales channels (e.g., online, in-store, wholesale), tailor your metrics accordingly. For instance, eCommerce might prioritize fast-moving stock, while brick-and-mortar stores might focus on displaying stock levels.
Example: Nike, selling both online and in-store, might monitor online sales for fast-moving stock, while ensuring their physical outlets maintain optimal display stock levels.
If you rely on global suppliers with long lead times, metrics related to order lead time and safety stock levels become crucial. For local supply chains, quick replenishment capabilities might shift your focus to turnover rate.
Example: Toyota, sourcing parts globally, monitors order lead times closely. When a key component had a 60-day lead time, they maintained higher safety stock levels.
Modern inventory management systems offer a plethora of data. Explore the metrics your software or system can track, and determine which align best with your business needs.
Example: Best Buy, using advanced inventory software, tracks real-time product sales across regions, helping them make swift stock allocation decisions.
Research industry benchmarks and see where competitors or similar businesses place their emphasis. This will give you insights into what's considered "good" in your specific sector.
Example: A small boutique clothing store might observe Zara's inventory turnover of 15 times per year as an industry benchmark, adjusting strategies to approach or surpass this rate.
It's essential to choose metrics that you can act upon. If a metric reveals an issue but doesn't provide a clear path to improvement, its utility might be limited.
Example: Starbucks tracks waste metrics. If a specific beverage has a 20% waste rate, they adjust batch sizes or promotional efforts accordingly.
Business dynamics, consumer behaviors, and market conditions change. Regularly review your chosen metrics to ensure they remain relevant and reflect current business realities.
Example: Microsoft, after launching a product, reviews sales and stock metrics quarterly. They saw Xbox Series X's stockout rate rise to 30% during holidays and adjusted future production plans.
Discuss with your inventory management team, salespeople, and other relevant departments. Their on-the-ground insights can offer valuable perspectives on which metrics are most helpful in daily operations.
Example: Whole Foods often discusses with store managers about produce stock levels. When avocados had a 10% stockout rate in a specific region, the feedback prompted a supply chain adjustment.
Once you've selected your metrics, monitor them over a set period. Analyze the results, and if a metric isn't providing the insights you need, consider adjusting your focus.
Example: Whole Foods often discusses with store managers about produce stock levels. When avocados had a 10% stockout rate in a specific region, the feedback prompted a supply chain adjustment.
BrightFoot, an emerging athletic footwear enterprise, seeks to enhance its inventory management in response to its accelerated growth by identifying the most critical inventory metrics.
They decided to follow our 10-step framework:
BrightFoot targets aggressive growth, aiming to increase market share by 25%. They identify that optimizing inventory to prevent overstock and stockouts is crucial to achieving this.
Considering the seasonal nature of their products with peak sales during athletic seasons, BrightFoot decides that metrics tracking the turnover rate during these peak periods are vital, aiming for a turnover rate of 12 times per year.
With a 30% increase in online sales, BrightFoot acknowledges the need to track the stockout rate specifically for their e-commerce platform, ensuring they maintain a stockout rate of less than 5%.
Due to reliance on overseas suppliers, BrightFoot faces a lead time of 40 days. They realize the importance of monitoring lead times closely, setting a benchmark to gradually reduce it to 30 days through alternative logistics solutions.
After integrating advanced analytical tools, BrightFoot can track real-time sales data, prompting them to focus on metrics for their best-sellers, noticing that their popular Flash Run sneakers turn over 18 times annually.
Comparing themselves with industry leaders, BrightFoot observes a standard turnover rate of 6 times per year and decides to aim higher to gain competitive advantage, setting their benchmark at 8 for general inventory.
BrightFoot chooses to prioritize sell-through rate and carrying costs, given their significant unsold inventory from the previous season, which incurred an additional $200,000 in storage fees.
Quarterly reviews show a consistent issue with overproduction of certain models. BrightFoot opts for a more dynamic model, adjusting their metrics to focus on items with a lower turnover rate.
Feedback from their sales team indicates a high demand for custom colors in-store. BrightFoot decides to track custom orders as a separate metric, noting a 15% increase in such requests.
After implementing these metrics, they notice a more consistent inventory level, with overstock reduced by 18% and related costs down by $150,000 annually.
We hope you now have a better understanding of what inventory metrics are and how to choose the right ones for your business.
If you enjoyed this article, you might also like our article on raw materials inventory or our article on available inventory.
