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A Beginner’s Guide To Inventory Metrics And Best Practices

Invntory metrics & inventory management best practices for professionals

When we look at some facts and figures, we find out that for retail, inventory is accurate only 63% of the time on average, or that 88% of supply chain managers estimate that they could reduce inventory levels by more than 5% with improved processes and technology. These numbers draft out a troubling scenario: most of the inventory management professionals are aware that the situation and their work could be improved, and that software could help – but they are not yet sure how to make it happen.

It shows us once more how important setting up and tracking the inventory KPIs for your business is in order to evaluate and improve your performance. Collecting big amounts of data is not the only thing to do; knowing how to process, analyze and visualize the insights you gain from it is key. In order to make the best decisions that will positively impact your business‘ bottom line, you need to have the full scope of your data. In the matter, a data analysis and dashboard designer software is a precious ally.

In this article, we will take a closer look at the inventory management: what are the performance indicator that can help, how to choose them, and outline some inventory metrics examples as well as best practices.

Exclusive Bonus Content: Inventory management: a summary guide
Download our short handbook to inventory KPIs and best practices!

What Are Inventory Metrics? Why Do We Need Them?

Like any other, the inventory metrics help you measure and assess your performance – and thus, give you some keys to improve it. They focus on a specific area and towards a specific goal. Inventory metrics can be common to different industries, and it is no surprise that you can identify one as a logistic KPI, but also see it listed as a retail KPI for instance.

By giving you clear milestones to hit every week, month, quarter or year, they help greatly in eliminating the guesswork. With them, you get the data you need to make strategic and better-informed decisions that will positively impact your business. Indeed, they help you drive the most effective behaviors, strategies and decisions. Among other things, they help in improving on-time deliveries, in reducing operating costs, in increasing customer satisfaction, or in optimizing transport.

How To Choose The Right Inventory KPIs?

When it comes to picking up metrics, everyone can be tempted to use the easiest, most ‘reassuring’ ones that capture efficiency – but it is far more difficult to choose the ones that reflect improvement in effectiveness. And these ones are more valuable. Same remark goes to the ‘vanity metrics’, that make a process of department look good but that do not deliver insights on how to enhance the effectiveness of inventory management.

Likewise, you should resist the urge to take metrics that have scope too broad: the insights they will deliver will not lead to quick and valuable action or reaction. The key in choosing the right indicators is to always keep in mind your business strategic objectives and to select them accordingly. What is complex and should not be overlooked in inventory management, is that operational, supply-chain related metrics and customer satisfaction metrics are involved. Indeed, your customers are the ones who are going to receive your inventory: if they get the wrong item, or late, or that it is out of stock for too long, the inventory will look like it is totally unmanaged and will leave them frustrated (and they probably won’t come back so often).

Once you have chosen the inventory metrics that will best fit your business and your needs, let’s go over some examples to illustrate them, as well as some best practices to observe.

Inventory Metrics Examples

Since both cost factor and customer experience are essential in inventory management and for any business, let’s have a look at a handful of promising inventory KPIs that cater to these two areas.

Inventory accuracy

this inventory KPI lets you know if what you actually have in stock matches the electronic record of your stocks.

Simple and straightforward: you need to know what you have in stock and what is passing through your warehouse. By performing regular cycle counts, equipping yourself with electronic tags will make the work easier and provide you with data needed to compare your physical inventory to the electronic record of it.

This is an inventory KPI that can make or break your business: if you do not have in stock what you sell online on your ecommerce platform for instance can considerably harm your business. This metric will also help spot issues related to shipping, receiving or accounting. Try to keep this ration over 92% as much as possible.

Inventory turnover

this inventory KPI evaluates the number of time your inventory is sold entirely.

The inventory turnover looks at how many times, over a certain period, your entire inventory is sold. You can calculate it by dividing the costs of goods sold by the average inventory. It is a good indicator when it comes to efficient production planning, process, marketing and sales management. As a general rule of thumb: the higher, the better.

If you have a low turnover, that might point out difficulties in turning your stock into actual revenue – you then need to investigate where the bottleneck(s) is(are), at any moment in your supply chain process.

Customer retention & loyalty

Customer retention is a highly important customer metric to measure loyalty.

Some studies state that even just 5% increase in customer retention will bring between 25 to 100% in profits across a wide range of industries. That some percentage you certainly do not want to miss, and yes customer loyalty is directly linked to your warehouse management and efficiency. Efficient picking, packing, shipping of accurate orders on time will keep customers coming back.

Besides, a satisfied customer often refers you to friends and relative, an act much more powerful than any witty advertisement you can make. This is something you can measure with a customer service KPI like the Net Promoter Score or NPS, that evaluates the power of your referral.

Warehousing costs

This inventory metric encompasses all the costs involved in the management of your warehouse, from human labor to transports.

This warehouse KPI evaluates the expenses involved in the management of your warehouse. Ordering, storing, loading the goods of your inventory – all this needs money to be executed properly. There are also human costs like labor, transport and delivery that should not be forgotten.

Measuring the warehousing costs is no piece of cake – this is why you should proceed to do it meticulously and not omit or forget any. Once it is done, it smoothens the overall management and adds value, which is often is appreciated by senior management and investors.

Inventory to sales ratio

this inventory kpi takes a financial point of view on your inventory, by evaluating the financial stability of your business and evaluating how much your overstocks are worth.

This inventory KPI is also oriented towards finances. It is one metric helpful to evaluate the overstock, that will also tell you whether your company is able to face unexpected situations. It is measured by dividing the available inventory for sale by the quantity that is actually sold. Combined with the inventory turnover or the carrying costs of inventory, it will give you a better picture of the financial stability of your business, but also help defining the direction you want to take (like selling your entire inventory as quickly as possible or not).

Exclusive Bonus Content: Inventory management: a summary guide
Download our short handbook to inventory KPIs and best practices!

Inventory Management Best Practices

As we have seen all along this article, inventory management is not something that is limited solely to warehouses; manufacturing companies need data on trends (seasonal information, price point, buying behaviors and patterns, etc) to make sure they always have enough for retailers. To master the art inventory management, here are a few tips.

ABC Analysis for categorization

To start with, a good technique for inventor management is to realize a hierarchy of your most valuable to least valuable items, by dollar value. As in general, not all your stock has an equal value, this will help in focusing on the items that bring in the most money. Classify them as follows:

. A-items: best-selling products with the highest priority. Need a permanent quality review and regular reordering
. B-items: valuable but with a medium priority. Monthly reordering is usually sufficient.
. C-items: low-priority stock, generally carried in high volumes and needing a minimal reordering.

Thanks to such organization, you can organize your warehouse according to how your inventory is sold and how much value which item brings to your business. It is good to optimize space, as well as streamline order fulfillment.

JIT – Just In Time

The Just in Time is another inventory management technique that helps with the cash flow management for retailers. JIT means that you only buy what you need from a vendor when you get an order from a customer. This technique can be a bit trickier for manufacturers because as we stated earlier, you need data on trends to have enough stocks for retailers.

Your business will best benefit from JIT if you are an ecommerce company, or if you build customized products such as jewelry, furniture, luxury cars, etc; but also as a service-based business (events, food, garage, etc).

Be data-driven

With the help of what we wrote above, you can choose the KPIs that fit best your business’ needs, and track them over time. You may start to recognize patterns and trends, but also bottlenecks and inconsistencies. All this will help you figure out how to improve your processes and enhance efficiency.

Benefiting from the numerous advantages data analysis tools provide will make you stand out of the crowd, and ultimately increase your efficiency even more. Data consolidation and analysis is simple, thanks to intuitive drag and drop interface. They will also help you visualize easily your insights and communicate them in a meaningful way through inventory dashboards.

Implement quality control

Last but not least, the quality control is of utmost importance for any business, and should be implement as early as possible. To ensure customer satisfaction and a steady business growth, it is imperative to have quality control processes.

From a procedures’ checklist to follow at the reception of an item, to damage monitoring and product compliance, make sure all your employees are aware of the entire quality control process that should be observed. When an item doesn’t match the company’s quality standards, they will return them to the supplier, and reduce the stock levels.

Inventory Dashboard Example

Now that we have gone over some metrics and best practices, let’s have a look at how it could look like on an inventory dashboard:

Supply chain management for inventory dashboard: a template

**click to enlarge**

We have here a good illustration of inventory management performed with the help of business intelligence and data visualization: the performance metrics that matter to the supply chain manager are tracked and displayed on a professional dashboard. To find more examples and templates, take a look at our other logistics dashboards.

Exclusive Bonus Content: Inventory management: a summary guide
Download our short handbook to inventory KPIs and best practices!

The inventory manager has a lot of responsibilities, and must act as an air traffic controller. He should effectively collaborate with his peers to coordinate and guide processes together, so that they get optimized inventory results. To be successful in this position, it is important to have an extended knowledge of the supply chain principles – but it is today equally important to have strong analytic skills. The use of online BI tools to set up and track the right inventory metrics they need is a must-do in order to spot out and catch any opportunity as they arise, and conversely identify problems to fix as soon as possible.

Thanks to this little guide to inventory management best practices and metrics, you have some of the keys in hand to have a better control over your business, and reap maximum benefit. To see how you can benefit from a BI software, simply try out our 14-day free trial!

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