The Japanese have a phrase that originated from their manufacturing and production philosophies: “kaizen.”
Kaizen means “constant improvement,” and it should be the mantra of all inventory managers. But before you can improve something, you actually have to know that it’s falling short.
It can be overwhelming to try to juggle every aspect of your eCommerce business without dropping any balls.
There are suppliers to be paid, supply chains to be managed, and customers to be served. How can you possibly stay on top of it all?
The answer is Key Performance Indicators (KPIs). In this post, we’ll review some of the most common (and some lesser-known) KPIs for businesses managing inventory.
In a sea of acronyms and metrics, we’ll also discuss how you can find the best ones to monitor for your unique business needs.
We’ve got a lot to cover, so let’s dive in.
What are inventory KPIs?
Inventory KPIs (Key Performance Indicators) are metrics used to measure and evaluate the effectiveness and efficiency of a company’s inventory management.
Just as doctors take your vital signs (blood pressure, temperature, height, weight) at your annual physical, inventory KPIs act as a reflection of the overall health of your business, and help you identify bottlenecks or problematic areas.
Why inventory KPIs & metrics are important for management
Inventory KPIs and metrics are important for management because they provide valuable information and insights into the efficiency and effectiveness of a company’s inventory management processes.
As Peter Drucker famously said, “Only what gets measured, gets managed.”
If you’re going to improve, grow, and stay competitive as a product-based business, tracking KPIs is non-negotiable.
Here are some tangible benefits of regularly tracking and improving KPIs:
Improving overall inventory management
By tracking inventory KPIs and metrics, leaders can identify areas where inventory management processes can be improved.
For example, by monitoring inventory turnover or DIO (days inventory outstanding), management can identify slow-moving, unsold inventory that may need to be discounted or liquidated to free up capital.
Identifying trends and patterns
Inventory KPIs and metrics can help management identify trends and patterns in inventory management over time. For example, by monitoring stockout rates, management can identify which products are frequently out of stock and adjust inventory levels accordingly.
This also informs how you structure your warehouse, how you promote these particular products on your website, and much more. Everything flows from your KPIs – that’s why they’re so important.
Efficient inventory management can help reduce costs associated with holding and maintaining inventory, such as storage, insurance, and labor costs. By monitoring inventory KPIs and metrics, inventory managers can identify opportunities to reduce these costs and improve profitability.
Monitoring KPIs can help businesses move in the other direction as well, by not only stopping the “leaks” of excess costs but increasing the productivity and profitability of the organization.
By monitoring inventory KPIs and metrics, management can identify opportunities to increase sales and reduce costs, leading to improved financial performance.
Types of inventory management KPIs and metrics
There are dozens and dozens of potentially trackable inventory management KPIs. Discovering and calculating those figures isn’t the hard part – it’s deciding what to track and what to ignore.
Your time is finite. You can only track so many metrics, and as a busy eCommerce leader, the last thing you need is to be distracted by SMS (Shiny Metric Syndrome, a close cousin of Shiny Object Syndrome).
Here are some of the most essential inventory management KPIs. Meaning, if you only track a handful of things, it should be the following.
Essential inventory management KPIs
This KPI measures the amount of cash flowing in and out of a business over a specific period of time. A positive cash flow indicates that a business has more cash coming in than going out, while a negative cash flow indicates that more cash is going out than coming in. Cash flow is important because it impacts a company’s ability to pay its bills, invest in growth, and remain financially stable.
Cost of Goods Sold (COGS)
This KPI measures the direct costs associated with producing and selling a product, including raw materials, labor, and manufacturing overhead. COGS is an important metric because it helps businesses calculate their gross profit margins and evaluate the profitability of their products.
Order fulfillment accuracy
This KPI measures the accuracy of inventory orders and shipments. It is typically measured as a percentage of orders or shipments that are accurately filled. A high order fulfillment accuracy rate indicates that a business is effectively managing its inventory and filling orders correctly, leading to increased customer satisfaction and repeat business.
This KPI measures the accuracy of shipments and deliveries. It is typically measured as a percentage of shipments that are delivered on time and with the correct items. A high shipping accuracy rate indicates that a business is effectively managing its shipping processes, leading to increased customer satisfaction and repeat business.
This KPI measures proper control of inventory levels, locations, and cost accuracy, which is critical to a business’s success. Good inventory management systems like SkuVault provide real-time access to inventory levels and locations, helping to increase profitability and customer satisfaction.
This KPI measures how many times a company’s inventory is sold and replaced over a specific period of time. A high inventory turnover ratio indicates efficient inventory management while a low ratio suggests that inventory is not selling quickly enough, leading to excess inventory costs.
Gross margin return on investment (GMROI)
This KPI measures the profitability of inventory investment by comparing the gross profit generated by inventory to the investment in that inventory.
This KPI measures the percentage of times that inventory is out of stock when customers want to purchase it. A high stockout rate suggests that inventory levels are not being managed effectively, leading to lost sales and dissatisfied customers.
Carrying cost of inventory
This KPI measures the cost of holding inventory, including storage, insurance, and other related expenses. A lower carrying cost of inventory indicates more efficient inventory management.
This KPI measures the time it takes for inventory to be replenished after it has been sold. A shorter lead time can help businesses reduce stockouts and improve inventory management.
Secondary inventory management KPIs
Once you’ve gotten the above KPIs locked in, you can move on to some non-essential (but still very helpful) secondary KPIs like the following:
Days inventory outstanding (DIO)
This KPI measures the average number of days that inventory is held before it is sold. A lower DIO indicates more efficient inventory management.
This KPI measures a business’s ability to accurately predict customer demand for its products. Effective demand forecasting can help businesses optimize inventory levels and reduce the risk of stockouts and excess inventory.
Your demand forecast accuracy will largely depend on the quality of your safety stock levels. This is the amount of inventory that you keep in reserve to hedge against unexpected demand or supply chain disruptions. Having too little can leave you underprepared while having too much can be a drain on resources.
This KPI measures the difference between the expected inventory levels and the actual inventory levels. Shrinkage can be caused by theft, damage, or mismanagement, and can result in lost sales and reduced profitability.
This KPI (also sometimes called storage costs) measures the costs associated with storing and maintaining inventory in a warehouse, including rent, utilities, insurance, security, and labor. Reducing warehousing costs can help businesses improve profitability and efficiency.
This KPI measures the ongoing costs associated with running a business, including salaries, utilities, rent, and other expenses. Managing operating costs is important for businesses to maintain financial stability and profitability.
Customer Satisfaction Score
This KPI measures the level of satisfaction customers have with a company’s products or services. A high customer satisfaction score indicates that customers are satisfied with the company’s products and are likely to become repeat customers.
This KPI measures the rate at which inventory is sold over a specific period of time. A high sell-through rate indicates that inventory is selling quickly and efficiently.
Average inventory value
This KPI measures the average value of a company’s inventory over a specific period of time. A high average inventory value indicates that a company is holding a significant amount of inventory, which can tie up capital and increase carrying costs.
Cycle counting accuracy
This KPI measures the accuracy of cycle counting, which is a method of inventory counting that involves regularly counting a small portion of inventory. Accurate cycle counting is important for maintaining the accuracy of inventory levels and identifying inventory shrinkage.
Lead time variability
This KPI measures the variability in the time it takes for inventory to be replenished after it has been sold. Reducing lead time variability can help businesses improve inventory management and reduce the risk of stockouts.
Reorder point analysis
This KPI measures the level of inventory at which a business needs to reorder products to maintain optimal inventory levels. Effective reorder point analysis can help businesses optimize inventory levels and reduce the risk of stockouts and excess inventory.
Check out our post for more in-depth information on the reorder point formula and how to calculate it for your business.
Total inventory value
This KPI measures the total value of all inventory owned by a business at a specific point in time. It includes the value of raw materials, work-in-progress, and finished goods.
High total inventory values can indicate that a business is holding excess inventory, which can lead to increased carrying costs and reduced profitability, while low total inventory values can indicate that a business may be at risk of stockouts and lost sales.
Inventory risk costs (and the KPIs that track it)
Inventory risk costs is an umbrella term that refers to a series of KPIs related to how holding inventory impacts business value.
These KPIs include:
These are the costs associated with inventory becoming outdated or unsellable, such as product expiration or changes in demand.
This inventory metric measures costs associated with inventory spoiling or becoming damaged, such as perishable goods or fragile items.
These are the costs associated with missed opportunities due to tying up capital in inventory, such as the potential for investments or expansion.
Theft and shrinkage costs
These are the costs associated with inventory being stolen or lost due to theft, damage, or mismanagement.
You could get very granular and break each of these costs up into their own KPI category, but we’d recommend starting by just tracking inventory risk costs as a catch-all inventory metric.
Then, as your inventory management system gets more sophisticated, you can graduate to tracking each of these individually.
Which KPIs should you track?
Alright, let’s stop to take a breath. We’ve covered a lot of KPIs here. And as the saying goes, if everything is urgent, nothing is urgent.
That means you need to prioritize which KPIs you track. And which KPIs to rack depends on a number of factors, including:
- Your industry
- Your company size
- Your available resources and current inventory management solution
If you’re feeling overwhelmed with what to track, our recommendation would be to start with the most essential and high-impact KPIs, which are:
1. Cash flow
For eCommerce businesses, cash flow is particularly important because of the potential for inventory-related cash flow issues. eCommerce businesses often have to invest significant amounts of capital in inventory, which can tie up cash flow and create liquidity issues.
Managing cash flow effectively can help eCommerce businesses optimize their inventory levels and balance their inventory-related cash flow needs with their other financial obligations.
2. Inventory turnover ratio
This is an essential KPI because it helps eCommerce business owners understand how quickly they are selling their inventory and how often they need to restock their inventory to meet customer demand. A high inventory turnover ratio is generally considered to be a positive sign, indicating that a business is selling inventory quickly and efficiently.
3. Gross margin return on investment (GMROI)
This KPI is important because it helps eCommerce business owners understand which products are the most profitable and which ones may be underperforming. A higher GMROI is generally considered to be a positive sign, indicating that a business is generating more profit per unit from its inventory investment.
These KPIs provide a comprehensive view of the efficiency and profitability of inventory management and can help business owners make data-driven decisions about their inventory levels and purchasing strategies.
Once you’re comfortable tracking these KPIs, they can gradually add other KPIs – such as order fulfillment accuracy, shipping accuracy, and customer satisfaction score – to gain more insight into their inventory management processes and identify areas for improvement.
It’s also important to use inventory management software or tools that can automate the tracking of these KPIs, as this can help reduce the workload and make it easier to stay on top of inventory management.
By starting with the most critical KPIs and gradually adding more over time, eCommerce business owners can gain valuable insights into their inventory management processes and make informed decisions that can help drive growth and profitability.
Best practices for manageable KPI tracking
Don’t try to keep it all in your head – use inventory management software
One of the biggest mistakes that eCommerce business owners make is trying to track inventory KPIs manually (this includes a static system like Excel or Google Sheets) or even worse, keeping it all in their heads. This will inevitably become overwhelming, time-consuming, and rife with errors.
Instead, business owners should consider using inventory management software like SkuVault that can automate the tracking of KPIs and provide real-time data on inventory levels, sales, and other key metrics.
Inventory management software can also help businesses identify trends and patterns in their inventory data, making it easier to identify opportunities for improvement and optimize inventory management processes.
To get control of your data, consider SkuVault’s powerful reporting features.
Maintain accurate documentation of processes and procedures
Another important best practice for manageable KPI tracking is to maintain accurate documentation of inventory management processes and procedures.
This includes documenting everything from inventory counts and order fulfillment processes to purchasing policies and supplier contracts.
We recommend every organization (product-based or not) establish a knowledge base. A knowledge base is a collection of documents and resources that employees can easily access to find information or get help. It’s much easier than searching through emails, chat threads, and spreadsheets.
Popular knowledge base platforms include Notion, Slite, and KnowledgeOwl.
By maintaining accurate documentation, businesses can ensure that everyone involved in inventory management understands the processes and procedures that are in place, which can help reduce errors and improve efficiency.
(Plus, you can actually take a vacation without getting blown up by your employees because everything is documented.)
Master the critical KPIs before attempting to track others
As mentioned earlier, cash flow, inventory turnover, and gross margin return on investment (GMROI) are the most essential KPIs for inventory management.
By focusing on these core KPIs and gradually adding other relevant KPIs over time, businesses can avoid getting overwhelmed and make data-driven decisions to optimize inventory management and improve profitability.
FAQs about inventory management KPIs and inventory management processes
What is the most important inventory KPI?
The most important inventory KPI is subjective and can vary depending on the specific needs and goals of a business.
However, the most essential and high-impact KPIs for inventory management in eCommerce businesses are inventory turnover, cash flow, and gross margin return on investment (GMROI).
These KPIs provide a comprehensive view of the efficiency and profitability of inventory management and can help business owners make data-driven decisions about their inventory management process and purchasing strategies.
How can I calculate my inventory turnover rate?
Inventory turnover rate is calculated by dividing the cost of goods sold (COGS) by the average inventory value for a specific period of time. The formula for calculating inventory turnover rate is:
Inventory Turnover Rate = Cost of Goods Sold / Average Inventory Value
For example, if a business had a COGS of $500,000 and an average inventory value of $100,000 over a period of one year, the inventory turnover rate would be:
Inventory Turnover Rate = $500,000 / $100,000 = 5
This means that the business sold and replaced its entire inventory five times over the course of the year.
What are inventory carrying costs?
Your inventory carrying cost is the cost associated with holding and storing inventory over a specific period of time.
These costs can include expenses such as rent, utilities, insurance, taxes, and labor, as well as the opportunity cost of tying up capital in inventory that could be used for other purposes.
Inventory carrying costs can impact a business’s cash flow, profitability, and financial stability, which is why it is important for businesses to manage their inventory levels and optimize their inventory management processes to minimize these costs.
What’s the difference between forecasted demand and actual demand?
Forecasted demand is an estimate of how much product a business is expected to sell over a specific period of time, based on historical sales data, market trends, and other relevant factors.
Actual demand is the actual amount of product that a business sells over that same period of time. The difference between forecasted demand and actual demand is known as forecast error.
If actual demand is higher than forecasted demand, this can result in stockouts and lost sales. If actual demand is lower than forecasted demand, this can result in excess inventory and increased inventory carrying costs.
What are some unnecessary inventory metrics to avoid?
Determining which KPIs are necessary or unnecessary for a given business depends on the specific needs and goals of the business. However, here is an example of a KPI that might be unnecessary for a small eCommerce business:
If a small eCommerce business does not sell products with expiration dates or perishable goods, then a KPI such as inventory age or inventory age turnover would obviously be irrelevant.
These KPIs measure how quickly inventory is being sold or how old the inventory is, which is particularly relevant for businesses that sell products with expiration dates.
However, if the eCommerce business does not sell products with expiration dates, tracking these metrics might not provide much value and could be considered an unnecessary use of time and resources.
How can I calculate average inventory value?
Average inventory value is calculated by adding the beginning inventory value and the ending inventory value for a specific period of time and dividing the sum by two. The formula for calculating average inventory value is:
Average Inventory Value = (Beginning Inventory Value + Ending Inventory Value) / 2
For example, if a business had a beginning inventory value of $50,000 and an ending inventory value of $100,000 over a period of one year, the average inventory value would be:
Average Inventory Value = ($50,000 + $100,000) / 2 = $75,000
How can I calculate lead time?
Lead time is the amount of time it takes for a business to receive a product after placing an order. To calculate lead time, eCommerce businesses should track the time between placing an order and receiving the product.
This can be done by recording the date of the order and the date of delivery and subtracting the order date from the delivery date.
Lead time is one of those inventory management metrics that can get very complicated very quickly, and often affects many other crucial metrics.
For more information on calculating lead time and reorder points, check out our post on the topic here.
What are fixed and variable costs?
Fixed costs are expenses that do not change regardless of the level of production or sales. Examples of fixed costs include rent, insurance, and salaries. Variable costs are expenses that vary based on the level of production or sales.
Examples of variable costs include raw materials, packaging, and shipping. By differentiating between fixed costs and variable costs, businesses can calculate their break-even point and determine the most cost-effective pricing strategy.
What is my recorded inventory?
Recorded inventory is the number of products that a business has in stock, as recorded in its inventory management system. This includes all products that have been purchased and received but have not yet been sold or shipped.
Recorded inventory should be regularly updated and compared to physical inventory counts to ensure that inventory levels are accurate and up-to-date.
What is supply chain efficiency?
Supply chain efficiency is the ability to optimize the flow of goods and services from the supplier to the end customer while minimizing costs and maximizing customer value.
This involves ensuring that the right products are available in the right quantity at the right time and location while minimizing inventory carrying costs and other expenses.
A well-designed and efficient supply chain process can help businesses reduce costs, improve customer satisfaction, and gain a competitive advantage.
What is deadstock?
Deadstock refers to products that are no longer in demand and have not been sold for a long period of time. Deadstock ties up capital and inventory space, which can impact cash flow, net sales, and profitability.
Effective inventory management and demand forecasting can help businesses reduce the risk of dead stock and minimize its impact on their operations.
What is sales ratio stock?
Sales ratio stock is a KPI that measures the ratio of sales to the amount of inventory held in stock. This metric helps businesses optimize their inventory levels by identifying which products are selling quickly and which products may be overstocked.
A high sales ratio stock indicates that the product is in high demand and that inventory levels should be maintained while a low sales ratio stock may indicate that the product is not in demand and that inventory levels should be adjusted.
What are some of the best ways to forecast demand?
There are several effective methods for creating reliable demand forecasts, including historical sales data analysis, market research, customer surveys, and industry trend analysis.
Using these methods, businesses can identify patterns and trends in sales data, understand customer preferences and behavior, and anticipate changes in market demand.
Leveraging inventory management software and other analytics tools can also help businesses analyze large amounts of data and identify patterns and trends to make informed decisions about inventory levels and purchasing strategies.
Effective inventory management is critical to the success of any eCommerce business, and tracking the right KPIs can provide valuable insights into inventory efficiency and profitability.
The most important inventory KPIs to track include:
- Cash flow
- Inventory turnover
- Gross margin return on investment (GMROI)
- Order fulfillment accuracy
- Shipping accuracy
By tracking these KPIs, businesses can optimize their inventory levels and purchasing strategies, minimize stockouts and lost sales, and improve customer satisfaction.
To streamline their inventory KPI tracking processes, it’s essential for eCommerce business owners to use inventory management software such as SkuVault.
SkuVault provides businesses with a centralized platform for managing inventory, orders, and shipments, and offers a range of features to help businesses track and analyze their most important inventory KPIs.
With SkuVault, businesses can set up alerts for low inventory levels, manage their inventory across multiple channels, and gain insights into their inventory efficiency and profitability.
SkuVault can help eCommerce businesses optimize their inventory management processes and improve their bottom line.
To learn more, check out our features page or click the link on this page to see a live demo.