A Beginner’s Guide To Inventory Metrics And Best Practices

In our cutthroat digital economy, colossal rafts of data are gathered, stored, analyzed, and optimized every minute of every day.  

What do these insights do, exactly? They deliver the best possible experience to customers and partners at every stage of their journey, across every channel or touchpoint. An integral part of business intelligence (BI), inventory metrics KPI are used to help managers and professionals reach (or even surpass) their core goals, optimizing processes and increasing business value in the process.

That said, It's extremely important setting up and tracking the inventory KPIs for your business in order to evaluate and improve your overall performance. Collecting big amounts of data is not the only thing to consider here: knowing how to process, analyze, and visualize your business’s most essential insights is key. To make informed decisions that will have a positive impact on your business’s bottom line, you need to have the full scope of your data. In the matter, data analysis and dashboard designer software is a precious ally.

In this article, we will take a closer look at inventory management, ask the question, “What are the performance indicators that can help?”, look at how to choose the right inventory metrics, and outline a mix of real-world inventory metrics examples. We will also work through some essential inventory KPI best practices. 

Towards the end of our data-driven journey, we will explore a genuine business dashboard to show you how those metrics work together when developing an inventory data story.

Let’s get started.

What Are Inventory Metrics?

Inventory metrics are indicators that help you monitor, measure, and assess your performance – and thus, give you some keys to optimize your processes as well as improve them. They focus on a specific area and goals in order to spot trends and identify weaknesses.

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, reducing operating costs, increasing customer satisfaction, or in optimizing transport.

How To Choose The Right Inventory KPIs?

To choose the most reliable and efficient inventory management metrics, here are some tips that you need to take into account:

• Avoid vanity metrics: When it comes to picking up metrics with professional KPI tools, 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 an improvement in effectiveness. And these ones are more valuable. The same remark goes to the ‘vanity metrics’, that make a process of the department look good but that do not deliver insights on how to enhance the effectiveness of inventory management.
• Focus on answering business questions: 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 to choosing the right indicators is to always keep in mind your business strategic objectives and to select them accordingly.
• Don't forget your customers: 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).
• Monitor trends: Comparing information with your past performance or setting a KPI scorecard template that you can translate to multiple business scenarios about your inventory measures and metrics will help you spot trends or inefficiencies in your processes. If your out-of-stock rate has had issues in the past weeks or months, you can dig deeper and find out why. That will help you take the right action at the right time.
• Don't rely on numbers only: Numbers are great but your growth should be focused on the quality, end-user, customer, or partner. If you're centered only on monitoring numbers, without focusing on the human aspect, you risk business bottlenecks in the long run.

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 for Better Management

Since both cost factor and customer experience are essential in inventory management for any modern business looking to make an impact in our cutthroat digital age, we’re going to look at the top 17 inventory KPIs that cater to these two most essential areas.

1. Inventory accuracy

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 ratio over 92% as much as possible.

2. Inventory turnover

Our next KPI template is 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.

3. Out of stock rate inventory KPI

Meeting customers' demands is critical in successfully managing your company's inventory, especially in the FMCG industry. Events that cause inventory to be exhausted should be avoided at all costs, although it can happen that some products are not available due to numerous reasons. In this case, the point is to monitor this rate and identify when and what is missing.

In our inventory KPI example illustrated above, you can see that the end of the working week has the highest percentage of out-of-stock rates. If you dig deeper into the data on the left, you can immediately spot the exact time of the day where the inventory experiences the highest rates. To be specific, you can see afternoons have a particular spike that will enable you to solve these issues and prepare for the future much better.

4. Customer retention & loyalty

Some studies state that even just a 5% increase in customer retention will bring between 25 to 100% in profits across a wide range of industries. That is 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 relatives, 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.

5. Carrying cost of inventory

One of the most critical inventory KPI metrics, the carrying cost of inventory, will show you the total of all expenses that occur when storing unsold goods. These costs can include warehousing costs, insurance, employee costs as well as damages of goods, rent, utilities, etc. Usually, carrying costs amount between 20% and 30% of the company's inventory value, and this significant percentage makes it an essential factor to account for and monitor closely.

This inventory management KPI is crucial to monitor accurately at all times since it will show you if your production should be increased or decreased to keep the balance between income and expenses. But not only, as analyzing this metric with the help of online business intelligence software will enable you to quickly examine where you can make changes in order to reduce costs (as the carrying costs are a large part of the total costs, as mentioned).

Another critical point to consider here is the fact that, if you're in an industry where profit margins are tight, even the smallest costs can play an extremely important role. In short, be mindful of your carrying costs.

6. Warehousing costs

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.

7. Average time to sell

Inventory KPI examples couldn't be complete without the average time to sell. Especially in the FMCG industry, where laws related to food safety and management need to be carefully respected in order to avoid potential legal bottlenecks. Therefore, tracking this internationally-renowned as well as a US inventory metric is critical for any industry that needs to respect international and local legal frameworks.

In our example above, we can immediately spot that tobacco has the highest average time to sell, followed by personal care, household care, and, finally, food and beverages. This makes sense since food and beverages have shorter freshness longevity and they need to be replaced more often than appliances, for example. This is one of the KPIs for inventory control that will provide you with useful information about your storing processes and give you more information on how to develop your procurement strategies. Additionally, you can connect this metric with a procurement KPI such as the cost reduction to see how you can allocate your savings, and how the average time to sell affects it. In an ideal scenario, the time to sell should be as low as possible.

8. Inventory to sales ratio

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 to define the direction you want to take (like selling your entire inventory as quickly as possible or not).

To analyze the financial perspective of your collected information in more detail, we suggest you take a look at our page focused on business intelligence in finance.

9. On-shelf availability

Any serious company that wants to increase revenue and profits, needs to evaluate demand and act accordingly, meaning keep products on shelves, visibly accessible, and easy to reach. It typically connects to other inventory performance metrics such as the out of stock rate and lost sales, for example, and covers 3 different critical points: shelf availability, store, and warehouse availability.

By utilizing advanced analytics solutions to measure such operational metrics, much of the manual work can be minimized. For example, modern software can track data in real-time and provide advanced charts that will immediately trigger actionable insights since the user doesn't have to manually scroll or search for information in numerous papers or spreadsheets. But let's get back to our visual example.

We can see the analysis expands throughout weeks and consider previously mentioned products: tobacco, personal care, household care, food, and beverages. That way, you can see the development of each product and examine if there were certain spikes that would cause losing customers. The increase in on-shelf availability can directly impact sales, and do it seriously. If you start losing large amounts of sales because of this metric, your whole business can suffer so it's of utmost importance to put the on-shelf availability on the list of key inventory metrics to measure regularly.

10. Order status inventory metric

Keeping an eye on your orders' status in real-time will enable your team to act promptly to any potential negative occurrence. This is a KPI for inventory management that connects your business with your customers. To effectively evaluate your supply chain metrics strategies, you need real-time access to the status of your orders: if the products are shipped, received, in the packaging process, or canceled. That way, you will be able to decrease the restocking and strive to achieve a higher number of new orders with the goal of keeping your business going. If you spot inefficiencies in your supply chain, it will affect your inventory, and, consequently, the overall business.

For example, if you have a higher percentage of orders that are canceled, it would make sense to examine why. Additional adjustments for retail inventory metrics should focus on the reasons behind slow processing, lower amounts of new orders, or higher inaccuracies. Compare this critical KPI inventory with your revenue as it should increase, too.

11. Percentage of sold products within freshness date

One of the inventory management KPIs built to reduce waste and enhance operational efficiency, FMCG offers a visual representation of the proportions of your inventory that has moved from the shelves or store and been fulfilled within its official freshness date.

By offering a comprehensive breakdown of how many items have sold within a certain time frame in relation to their expiry date, you will gain the insight required to make strategic tweaks to strike the perfect balance between stock efficiency, waste reduction, and shelf space. With the FMCG inventory metric, you can pinpoint the products or items that might need better quantity management or merchandising while developing promotional initiatives to turn over your inventory within a suitable time frame. A sure-fire way to boost your bottom line.

12. Sell-through rate

An essential part of a retail KPI dashboard, this inventory metric is particularly powerful for driving optimum retail performance. With your sell-through rate, you can visualize the correlation between your inventory received and sold over a specific period.

By gaining access to this invaluable information, you can use this most valuable inventory KPI metrics to monitor your sell-through performance and, ultimately, make targeted improvements to key aspects of your sales and merchandising processes. In turn, you will keep your inventory movement flowing consistently, maintaining productivity as well as income growth. 

This is one of the most vital inventory metrics for retail at your disposal. Track this KPI frequently, and you will build solid, fluent foundations for your inventory management strategy while scaling the business with confidence.

13. Average inventory level

Your average inventory level is exactly what you might expect: a clear-cut visualization outlining your mean inventory level over certain time periods.

One of the most useful inventory health metrics for any modern business looking to streamline their operations, average inventory level will give you an accurate outline of how much inventory your business holds throughout the year.

By removing seasonal fluctuations and other variables from the equation, you can use this metric to hone in on any inventory losses that might have happened due to the likes of damage, theft, shrinkage, or waste. If you can pinpoint these problems, you can tackle them head-on, preventing any further losses or inefficiencies in your supply or fulfillment chain.

14. Backorder rate

The backorder rate is an effective way of monitoring how many goods or items can’t be fulfilled at the time a customer confirms or places an order.

By using these most insightful inventory accuracy metrics to your advantage, you can set a definitive fulfillment target and track your progress over a weekly, monthly, or annual basis. In doing so, you will gain the power to pinpoint the exact reasons for an increase or reduction in backorder rate during certain periods and make strategic tweaks to improve or update your supply chain processes for success.

A large backorder rate sometimes means more sales (which is, of course, positive). Understanding this will give you the tools you need to ensure you can fulfill all of those extra orders effectively.

15. Week on-hand

A most essential of our inventory metrics for manufacturing, as well as many other inventory-heavy sectors, weeks on-hand, is a KPI that quantifies investment in terms of time rather than items or units of currency.

Weeks on-hand provides a definitive outline of the average amount of time your inventory actually sells in a given week. The reason this specific metric is so effective is its ability to weed out any roadblocks slowing down the time it takes for an item to enter your system, sell, and head to its end destination.

If you have slow weeks on hand, it will become clear that your stock or inventory movement is slow and needs attention. By pinpointing these issues quickly, you and your team can work to drive down your weeks on-hand consistently, get your stock moving, and boost your bottom line year after year.

16. Gross margin return on investment (GMROI)

Gross margin return investment (GMROI) is one of those inventory management metrics that shine a light on income versus investment.

Your GMROI will tell you exactly how much money your business has made compared to how much you’ve spent on your stock or inventory over a particular period.

Armed with this information, you can take measures to improve your GMROI by investing in the inventory that offers a consistently solid return while reducing expenditure on the items that are consistently bogging your business down or draining your budget. It’s an excellent efficiency-driving tool for eCommerce businesses, retailers, and even manufacturers.

17. Time to receive

An essential component of any inventory management dashboard, time to receive is a KPI that drills down into stock fluency and movement.

Tracking this metric visually will empower you to understand the rate at which your team or staff bring in stock and add it to the shelves, coupled with the speed or efficiency at which they prepare said stock for sale.

Benchmarking this metric consistently is useful, as you will be able to spot trends as they emerge. If you notice your time to receive rates slowing down, you will know that there is an inefficiency lurking within your warehouse.

Whether the snag is a poor process or a staff training or development issue, you can use your time to receive KPI to uncover it swiftly, tackling the issue before it has a negative impact on your fulfillment strategy.

Inventory Metrics Examples on Dynamic Dashboards

Now that we have gone over some metrics, let's have a look at how it looks like on real-world examples and dashboards.

a) Inventory analytics dashboard for supply chain

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Here is 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. In this case, we can see inventory measurement metrics such as the inventory to sales, turnover, carrying costs, accuracy, and the percentage of stock items on a dynamic, online data visualization overview. This visual will enable you to create an effective data story that will translate into positive business results since you will save time in the analysis process and increase productivity.

To find more examples and templates, take a look at our other logistics dashboards.

b) Inventory analytics dashboard for retail

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Retail is another industry that heavily relies on inventory availability metrics and optimal management in order to increase revenue and profits. Especially in online retailing, where consumers can access massive amounts of products with a few clicks. That's why having online dashboard software that covers multiple touchpoints and enables retailers to have a clear overview of their inventory management is crucial in our consumer-faced world.

The best metric for managing inventory strategies, the return reasons will help you to identify what kind of products in your inventory don't fit customers, are damaged, or simply were wrongly delivered. That way, you will be able to manage your inventory more effectively and avoid potential issues in the future, even before they arise.

The top sellers by orders will clearly show what items you need to have in your inventory so that your business and potential revenue doesn't get affected negatively and retail analytics software will help you automate your processes and track massive volumes of information, which is critical in this competitive industry.

c) FMCG KPI dashboard for a mix of modern industries

Earlier, we talked about the average percentage of items sold within their freshness data (FMCG) KPI. Now, we’re going to look at an entire FMCG dashboard dedicated to the concept.

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Featuring a cohesive mix of inventory management KPIs, this dynamic inventory dashboard is a powerful portal for managing every major cog in your supply chain with accuracy and confidence.

Each KPI and visualization is geared towards improving the operability of your inventory management processes, drilling down into areas including average time to sell, out of stock rates, items delivered on time and in full, and, of course, the proportion of items sold within their official freshness date.

With each KPI for inventory management occupying a dedicated space on the dashboard, it’s possible to make swift real-time decisions at a glance while examining patterns or trends and making definitive comparisons.

Here, for example, you could deal with an “out of stock” issue as it emerges, putting the appropriate inventory replenishing measures in place while tracking your inventory turnover over the past few months to feed into your fulfillment efficiency initiatives.

Every one of the inventory metrics examples that populate this powerful dashboard helps to take the guesswork out of the “hows” and “whys” of your inventory management strategies. By using this as your logistical nerve center, you can paint a vivid picture of your supply chain and ensure everyone involved is working towards the right targets at the right time.

As a result, you will drive down unnecessary costs, significantly rescue waste or damage, get your stock or inventory flowing like never before, and, ultimately, expand your bottom line – the key ingredients for commercial growth and evolution.

Inventory Management Best Practices

As we have seen all along with 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. Retailers need data to effectively manage their restocking, and FMCG to bring fresh products and optimize processes every day. To master the art of inventory management, here are a few tips.

a) ABC Analysis for categorization

To start with, a good technique for inventory 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 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 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.

b) JIT – Just In Time

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).

c) 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 are simple, thanks to the intuitive drag and drop interface. They will also help you visualize easily your insights and communicate them in a meaningful way through inventory dashboards.

d) Implement quality control

Last but not least, quality control is of utmost importance for any business, and should be implemented as early as possible. To ensure customer satisfaction and 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.

Key Takeaways Inventory Metrics

We have explained inventory management performance, provided examples, best practices, and finalized with dashboards where all those pieces can come together to tell an efficient story that will enable you to optimize your inventory management processes and deliver invaluable results year after year.

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 companies can reap a 25% increase in productivity and a 30% improvement in stock efficiency if they use integrated order processing for their inventory management. 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. 

The inventory manager has a lot of responsibilities, essentially acting as a business’s air traffic controller. To succeed, inventory managers need to take a collaborative approach to their efforts while using every relevant strand of data to their advantage.

Inventory efficiency metrics and KPI inventory data are your light in the dark - your consultant and guide when it matters most. Squeeze every last drop of value from your inventory dashboard insights, and you will reap great rewards.

Extensive knowledge of supply chain principles and strong analytical skills will amount to consistent success, progression, and growth. Using online BI tools to set up and track the right inventory metrics will ensure you can spot any opportunities as they arise while identifying potential problems as they emerge.

Thanks to this little guide to inventory management best practices and metrics, you have some of the keys in hand for better command over your business - now, the only way is pure how to make it happen.

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