In the current business environment, effective inventory management is crucial for achieving operational excellence and maximizing profitability. As businesses increasingly rely on data-driven decisions, understanding and tracking key performance indicators (KPIs) becomes essential.
These metrics provide insights into various aspects of inventory management, helping you optimize stock levels, reduce costs, and enhance customer satisfaction. Recent trends indicate a growing emphasis on advanced analytics and automation in inventory management, enabling businesses to make more informed decisions swiftly.
In this blog, let’s understand some of the key performance indicators (KPIs) in effectively managing your supply chain operations in general and inventory processes in particular. Understanding these KPIs in depth and effectively applying them in your day-to-day operations can positively impact your organization’s supply chain climate. Lastly, this blog talks about the role of a mobile inventory management solution in enhancing your organization’s KPIs with specific reference to Propel Apps’ mobile inventory management solution.
Overview
Top Inventory Management KPIs that you need to ponder
Let’s understand some of the vital KPIs that are essential to effectively manage your inventory. Below, we outline the most impactful KPIs along with their formulas:
1. Inventory Turnover Ratio
This KPI measures how quickly your inventory is sold and replaced over a specific period. A higher ratio indicates efficient inventory management.
Formula:
Inventory Turnover Ratio=Cost of Goods Sold/Average Inventory
Let’s take a practical example to understand this KPI better. Let’s assume that if your cost of goods sold is $500,000 and your average inventory is $100,000, your turnover ratio would be 5. This means you sell and replace your inventory five times a year.
2. Average Days to Sell Inventory (DSI)
This metric shows the average number of days it takes to sell your entire inventory. A lower DSI indicates quicker sales.
Formula:
DSI= Cost of Goods Sold/Average Inventory × 365
Example: If your average inventory is $100,000 and your cost of goods sold is $500,000, the DSI would be 73 days.
3. Sell-Through Rate
This KPI indicates the percentage of inventory sold during a specific period compared to what was received from suppliers.
Formula:
Sell Through Rate = (Units Sold/Units Received) × 100
Example: If you received 1,000 units and sold 800 units in a month, your sell-through rate would be 80%.
4. Stock-to-Sales Ratio
This ratio compares the amount of inventory available for sale against the sales volume over a specific period.
Formula:
Stock to Sales Ratio=Average Inventory/Sales
Example: If your average inventory is $200,000 and sales are $1 million, your stock-to-sales ratio would be 0.2.
5. Fill Rate
The fill rate measures the percentage of customer orders that are fulfilled completely on the first shipment.
Formula:
Fill Rate = (Number of Complete Orders/Total Number of Orders) × 100
Example: If you received 1,000 orders and fulfilled 950 completely, your fill rate would be 95%.
6. Perfect Order Rate
This KPI assesses the percentage of orders delivered without any errors (on time, complete, undamaged).
Formula:
Perfect Order Rate= (Number of Perfect Orders/Total Number of Orders) × 100
Example: If you processed 1,000 orders and 900 were perfect, your perfect order rate would be 90%.
7. Lead Time
Lead time measures the time taken from placing an order with a supplier to receiving it.
Formula:
Lead Time=Date Inventory Received−Date Order Placed
Example: If it takes an average of 10 days to receive goods after ordering them from suppliers over ten orders, your lead time is 10 days.
8. Inventory Carrying Cost
This KPI reflects all costs associated with holding unsold goods in stock.
Formula:
Carrying Cost=(Total Inventory Value × Carrying Cost Percentage/100)
Example: If your total inventory value is $500,000 and the carrying cost percentage is 20%, then your carrying cost would be $100,000 annually.
9. Backorder Rate
This metric tracks the percentage of customer orders that cannot be fulfilled at the time they are placed due to stockouts.
Formula:
Backorder Rate = (Number of Backordered Items/Total Number of Orders) × 100
Example: If there are 50 backordered items out of a total of 1,000 orders placed, your backorder rate would be 5%.
10. Customer Satisfaction Score (CSAT)
This KPI gauges customer satisfaction regarding product availability and service quality.
Formula:
CSAT= (Number of Satisfied Customers/Total Number of Customers) × 100
Example: If out of 500 surveyed customers, 450 reported satisfactions with their order experience, your CSAT would be 90%.
Mobile Inventory Management Solution in Enhancing KPIs
A mobile inventory management solution can significantly enhance inventory KPIs by improving real-time visibility, accuracy, and operational efficiency. It reduces manual errors through features like barcode scanning and RFID, improving inventory accuracy and lowering shrinkage. Real-time updates facilitate better demand forecasting, optimizing stock levels to reduce stockouts and overstocking while improving inventory turnover.
This solution also streamlines picking and packing processes, increasing order fulfillment speed and employee productivity. Additionally, they help lower carrying costs and enhance asset utilization, driving improved return on assets (ROA) and overall profitability. By enabling data-driven decision-making through centralized dashboards, a mobile inventory management solution empowers businesses to achieve sustained inventory performance improvements.
Towards this end, explore a cutting-edge, cost-effective mobile inventory management solution like that offered by Propel Apps, a leading digital transformation company. This solution optimizes supply chain processes including picking, packing and the entire spectrum of logistic operations for Oracle EBS, Oracle SCM Cloud, and SAP S/4 HANA. Simply stated, this solution is aimed to propel your supply chain efficiency to the next level, while accentuating your organization’s journey towards rapid digital transformation. To know more about this solution and how it can improve your inventory and supply chain efficiency, schedule a free demo with us.
Final Thoughts
Monitoring these KPIs allows you to gain valuable insights into your inventory management processes and make informed decisions that drive efficiency and profitability. By focusing on these metrics—such as turnover ratios, lead times, and customer satisfaction—you can identify areas for improvement and implement strategies that enhance overall performance.
As you delve into optimizing your inventory management practices through these KPIs, remember that each business is unique. Tailor these metrics to fit your specific operational goals and continuously review them to ensure they align with changing market conditions and consumer behaviors. Embracing data-driven strategies, supported by a cutting-edge mobile inventory management solution, will ultimately lead to better stock control and improved customer experiences in an increasingly competitive landscape.
