What is it that is making your online store a success?
Which strategies are
contributing to the increase in your sales and revenue?
Answers to these questions and more are essential to understanding all the
aspects of your business and its continued growth.
But to understand those aspects, you have to have some way of measuring the
performance of different areas of your business. To do that, you need to
understand how to monitor the right key performance indicators (KPIs).
There are numerous KPIs that you can track in different areas of your
business. For the purposes of this post, we’ll look at the important KPIs that
relate to inventory management, and how to measure them.
To make it easy, we’ve broken them down into three sections: sales,
receiving, and operational KPIs. Let’s take a look at each section
individually in this inventory KPI list.
If tracking inventory is important to you (it should be) get a demo of the
SkuNexus platform to see our unique approach to dashboards.
Inventory Management KPIs to Track
Within each section, we will define the specific, standard inventory KPI, tell you
how it’s calculated (inventory KPI formulas), and what it each metric tells you
about your stock, processes, or sales. The third is the most important, since
data is useless without an actionable understanding of it.
Sales KPIs
These KPIs are influenced by your customers’ actions and they will let you
know how your inventory is affected.
Stock to Sales Ratio
Definition: The ratio of stock available for sale versus the stock that has been
sold.
Formula: Units available ÷ Units sold
What it means: The stock to sales ratio will help you keep your inventory at
optimum levels. If you have too much inventory, you are tying up capital that
could be better spent elsewhere. Conversely, if you have too little stock, you
may run out, which is the number one thing not to do for retailers.
Sell through Rate
Definition: The percentage of units sold during a specific time period.
Formula: Units sold ÷ (Units sold + On-hand inventory)
What it means: Your sell through rate tells you the percentage of your
available inventory that actually sold. When the rate is too low, it means you
have too many units on-hand (you overstocked), or you priced too high. When
the rate is too high, it may mean that you have too little inventory, or you
priced too low.
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Weeks On-Hand
Definition: The average amount of time it takes to sell the inventory it holds.
Formula: Average Inventory ÷ Cost of Goods Sold x 52
What it means: This KPI tells you how your efficiently your inventory is moving.
When the weeks on-hand is high, it means that your inventory is not moving
efficiently, which results in a lower profitability due to storage fees and tied up
capital. When the weeks of inventory on-hand is low, it means that your
inventory is moving quickly and efficiently.
Inventory Turnover Rate
Definition: A ratio that shows how many times inventory was sold and
replaced during a specific time period.
Formula: There are two calculations that will show your Inventory Turnover
Rate:
Sales ÷ Average Inventory or Cost of Goods Sold ÷ Average
Inventory
What it means: This KPI tells you how fast you are selling your inventory. It’s
often measured against the turnover rate of industry averages. When your
turnover rate is low, it indicates you have weak sales and excess inventory. A
higher ratio shows that you have either strong sales or it could indicate that
you are giving customers large discounts.
Back Order Rate
Definition: Shows how well you stock products that customers demand.
Formula: (# of Customer Orders Delayed due to Backorder ÷ Total # of
Customer Orders Placed) x 100
What it means: This KPI indicates whether or not your inventory is meeting
customer demands. A higher back order rate tells you that your forecasting is
inefficient or your inventory management needs work. A lower back order rate
means that you are experiencing slow order cycle times and that you run the
risk of customers being dissatisfied.
Days to Sell Inventory
Definition: How long it takes to turn your inventory into sales.
Formula: (Average Inventory ÷ Cost of Sales) x 365
What it means: This KPI tells you the time period that it takes for your
inventory to convert into sales. When the number is high, it may indicate that
your inventory movement is inefficient. However, the optimum days to sell
inventory varies depending on the industry you’re in. If you sell large ticket
items, they typically move slower than lower-priced products.
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Receiving KPIs
These KPIs are tied to the receiving of stock and may overlap with warehouse
KPIs.
Time to Receive
Definition: How efficient your process for receiving stock is.
Formula: The time taken for received stock to be validated, added into
inventory records, and be ready to put away.
What it means: This KPI tells you how efficient your receiving process is.
Knowing the rate at which your stock is received and becomes ready to sell will
help you identify any deficiencies that are occurring in your warehouse, so they
can be addressed quickly.
Put Away Time
Definition: Total time taken during the entire process of each put-away task.
Formula: The time taken for received inventory to be put away and
ready to pick.
What it means: This KPI tells you how effective your put-away process is.
When your put-away process is efficient, your lead time is significantly lower.
Operational KPIs
These KPIs measure the effectiveness of operational costs, of which a large
part is labor costs.
On Time Orders
Definition: The percentage of the time that customers receive their orders on
time.
Formula: # of Orders Delivered On Time ÷ Total # of Orders
What it means: This KPI indicates your performance in getting customers
their orders within the time that you have specified. The higher the number the
better. When you’re on time order percentage is low, you will likely experience
customer service issues and dissatisfied customers.
Shrinkage
Definition: The percentage of inventory that is listed in records but is not
physically in the actual inventory.
Formula: (Cost of Recorded Inventory – Cost of Physical Inventory) ÷
Cost of Recorded Inventory
What it means: This KPI, when excessive, may mean that you have a problem
with inventory damage, theft, miscounting, or supplier fraud (when a supplier
bills for more products than it sends), and that a thorough investigation should
be performed.
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Average Inventory
Definition: The amount of inventory on-hand during a specific period of time.
Formula: (Beginning Inventory + Ending Inventory) ÷ 2
What it means: This KPI tells you how much stock you have on average
during a specific time frame. Your average inventory shouldn’t have
unexplained drops or spikes. The aim is to keep your inventory flow in and out,
in a relatively consistent manner.
Rate of Returns
Definition: The percentage of shipped items that are returned to you.
Formula: (# of Items Returned) ÷ (Total # of Items Shipped)
What it means: This KPI tells you how much of your inventory is being
returned to you, allowing you to identify any patterns of issues (defective or
malfunctioning products, inferior quality products, etc.).
Cost of Carrying Inventory
Definition: The percentage representing cents per dollar that is spent on
inventory overhead each year.
Formula: Carrying Costs ÷ Overall Cost
What it means: This KPI tells you how much you will spend (as a percentage)
to hold and store your inventory annually. When you need to reduce your cost
of carrying inventory, it’s important to reduce your inventory by eliminating
obsolete, slow-moving, or dead stock inventory.
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