Top 10 KPIs for Inventory Management

It goes like this

You set a strategy to improve something in your business, implement it right away, forget about it, and are left wondering if it ever worked according to plan.

Well, maybe it did, maybe it did not. 

The only way to know that?

Measure your results 

Key indicator performance metrics, or KPI, have been around for a while. 

But how often do you use them as part of your inventory management approach?

Using these sorts of metrics is one of the most accurate methods you can follow to understand what's happening with your inventory and warehouse.

However, how can you know what KPIs are the most adequate to optimize your inventory? 

Glad you asked

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Why Should You Care About KPIs in Inventory Management?

Without a proper performance assessment, you can't know whether what's happening with your inventory is a success or not.

As simple as that 

In any business process, working with performance indicators is considered good practice, for inventory management, however, things take another level of seriousness.

Demand fluctuations, supply chain disruptions, market changes…The factors that could impact your inventory levels are always there, so working to find the best strategies is a must.

A huge part of it?

Begins by establishing metrics that matter for your operations. 

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Types of Inventory Management KPIs 

Metrics are crucial, yes, but depending on what you exactly attempt to assess, you'll be relying on one category or another. 

Here are the most common ones:

Operational 

Absolutely relevant at any point.

Operational metrics are how you focus on the behind-the-scenes part of everything related to keeping your inventory running as expected.

It includes going over questions such as: 

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• Are day-to-day operations happening without any hiccups?
• Are administrative tasks handled correctly?
• What's the rate of stockouts for this period?
• How's forecasting demand helping the company?

Customer service 

Because no matter what, at the end of the day, an inventory works to keep customers satisfied.

How well you meet customer demand can have a huge impact on the success of your business.

These KPIs track how often and how quickly you're able to fulfill orders without delays or stockouts.

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Financial 

Oh well, yes, customer satisfaction is important, but so it's maintaining a healthy flow of income. 

Financial KPIs analyse the relationship between your stock and the money spent.

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Top 10 KPIs for Better Inventory Management 

Inventory turnover ratio

Probably the most important one, regardless of the industry.

This metric is fundamental to understanding how many times you've sold and replaced your inventory over a certain period, like a month or a quarter.

If the number you get is on the higher side, it means your products are moving off the warehouse quickly, something that, most of the time, is a positive sign, as it means more sales are happening.

On the contrary, if the number is low, you might be overstocking products that aren't really contributing to the growth of your business.

How to calculate it?

Inventory Turnover = Cost of Goods Sold / Average Inventory

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How to optimize it?

If you find out that your turnover ratio is definitely too low and doesn't make sense for your business model, you could try making a pause to analyze your purchasing and spending habits. Relying on forecasting tools can help you discover what products your customers are actually craving.

But what happens if it's too high? 

Well, that could be a sign that at some point you could face those dreadful stockout scenarios, so be on the lookout. 

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Days' sales of inventory 

Also known as DSI 

Absolutely useful to discover how many days on average it takes to sell your current stock. 

So, if you want to find a better balance between owning too many products and owning too few, this number could provide an accurate picture. 

The lower the number, the faster you're selling those products, which obviously means that money is coming in. 

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How to calculate it?

DSI = (Average Inventory / Cost of Goods Sold) × 365

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How to optimize it?

Well, how you see it, it's going to depend on your business, for example, if you work in a very specialized industry, it could be relatively normal to see high DSI numbers, as your inventory takes just a bit longer to move in the market.

On the other hand, if your industry is one of those moving fast, you could consider a marketing alternative for those slow to sell products.

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Gross margin return on investment 

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Gross margin return on investment, or GMROII, is a key financial measure that should be part of every inventory management performance assessment. 

It literally lets you know how much gross margin you are earning for every dollar invested in your inventory.

Pretty important 

When you design a plan around your inventory, you don't just want to have a nice-looking warehouse filled with products, your end goal is to make money and not waste resources.

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How to measure it?

GMROII = Gross Margin / Average Inventory Cost

How to optimize it?

Finding that your GMROII is low represents an opportunity to ask yourself some important questions, such as:

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• Are our most profitable products getting sufficient attention?
• Are low-margin products perhaps occupying too much stock space?

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Order fill rate 

Do you wonder how you can know if your current inventory strategy is working?

Look at your customer's orders. 

This metric comes in handy to discover the speed with which you're able to fulfill your client's purchases based on your available inventory. 

Obtaining a high number means good news. Your customers are obtaining what they want, the moment they expect it. 

A low fill rate?

That's how problems begin. 

How to calculate it?

Order Fill Rate = (Number of Orders Fulfilled Completely / Total Orders) × 100

How to optimize it?

Having a low fill rate might seem problematic, but it's nothing that cannot be fixed. 

Perhaps it's time to review your supply chain so you can find out if the problem is there, or maybe it's something simpler, like working with an inventory management system so you can get restock alerts the moment they're needed. 

Perfect order rate 

Nothing is ever perfect, they say. 

But when it comes to keeping people loyal to your brand, you want to aim for perfection whenever it is possible. 

A perfect order rate is the measure you set to understand how well your delivery is doing in terms of getting the product to your client without issues.

Think of factors like arriving on time, complete, with no damage, and zero mistakes.

It's a matter of quality above all. 

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How to calculate it?

Perfect Order Rate = (Number of Perfect Orders / Total Orders) × 100

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How to optimize it?

To get closer to those perfect numbers, you are going to need to put some extra effort into your strategy. Most of the time, the fault lies in either your suppliers' performance or your warehouse management. 

For example, have you considered the quality of the materials you are using to manufacture your products?

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Stockout rate

As customers, we all know how annoying it is to decide to purchase a product only to find out that it is no longer available.

As a business leader, it's your responsibility to make sure that doesn't happen to your customers. 

A stockout rate allows you to measure the percentage of customer demand you are struggling to meet. 

And that's the problem with stockouts: they directly hit your reputation. 

How to calculate it 

Stockout Rate = (Number of Stockouts / Total Demand Occasions) × 100

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How to optimize it

Stockouts mean you are losing sales opportunities, customers' loyalty, and well…money.

In order to fix it, start by using forecasting tools so you can be prepared to handle unexpected shifts in your demand levels. 

Demand forecast accuracy.

And speaking about forecasting.

Yes, knowing what's going to happen in the near future regarding your stock is absolutely useful, but only if the predictions are right.

Accurate forecasts mean you can order the right products, in the right quantities, at the right time. Get it wrong, and you risk overstocking, stockout, and losing more than just money in the long run.

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How to calculate it?

Forecast Accuracy (%) = [1 - (|Forecast - Actual| / Actual)] × 100

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How to optimize it?

No, you don't need a crystal ball to make the right predictions about your inventory. But you need to rely on high-quality data. 

If your forecasting is not giving you the results you expected, take a look at the information you are using. Is it accurate? Is it complete and relevant for your company?

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Time to receive 

This is another critical metric that measures both inventory management and the efficiency of your supply chain.

Use time to receive to determine how long it takes from the moment inventory arrives at your warehouse to when it's ready to go as a final product or part of one. 

A slow receiving process can quickly become a source of problems, especially when your demand goes high and you are left with zero stock available.

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How to calculate it?

Time to Receive = Time Inventory is Available - Time Inventory Arrived.

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How to optimize it?

Make your receiving process faster, working with new technologies like barcode scanners or even drones to handle the picking and shelving activities with incredible accuracy and speed. 

Inventory carry cost

Inventory is a critical part of your business, yes, but that doesn't mean it's cost-free.

Inventory carry cost comes in useful if you need to figure out how much you are paying for keeping your inventory over time. 

Think of activities like storage, maintenance, taxes, and even insurance.

If your carrying costs are too high, your profit margins could shrink without you noticing.

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How to calculate it?

Inventory Carrying Cost (%) = (Total Carrying Costs / Total Inventory Value) × 100

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How to optimize it?

To lower carrying costs, look at clearing out dead stock, tightening up your reorder points, and reducing excess inventory. Also, negotiate better storage terms or explore just-in-time inventory models if they make sense for your business.

Returns rate

This metric tells you what percentage of products come back after being sold, whether due to defects, wrong items, or customer dissatisfaction. Understanding your returns helps you fix root issues and improve the customer experience.

How to calculate it?

Returns Rate = (Number of Returned Units / Total Units Sold) × 100

How to optimize it?

Keep an eye on which items are coming back most often and why. Better product descriptions, sizing charts, or packaging can drastically reduce returns, and save you a lot of operational issues.

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