Top Inventory KPIs that you need to know

Top Inventory KPIs that you need to know

In business, Key Performance Indicators (KPI) are necessary to identify pain points. There are many KPIs that portray efficiency and mismanagement in many different business functions. From Logistics, Finance, Operations, Sales, and Inventory, you can use a number of statistics that will usually provide a numerical depiction of how that department is doing. Although every industry has different metrics that more accurately describe the company’s performance, there are several inventory KPIs that are important to discuss. In this article, we will describe which of these inventory statistics are most necessary to keep in mind and why.


• Avergae Inventory :
The average count of a set of goods during two or more specific time periods. The average of the beginning amount of one month and the end amount of another month helps to shows the fluctuation of inventory. Alone, the average inventory number is just a metric but is a necessary value when used to compare with other metrics and formulas.

Average Inventory = (Beginning Inventory + Ending Inventory) / Number of Months
Average Inventory Formulas


•  Inventory Turnover Ratio :
One of the more important statistics for inventory analysis. The ratio shows the frequency that inventory stock is sold, used, and replaced during a given time period.

IT Ratio = Net Sales / Average Inventory Or IT Ratio= COGS / Average Inventory
Inventory Turnover Ratio

A higher ratio is a sign that your company’s sales is strong, and you are moving products frequently, sales is higher than purchases. A lower ratio usually represents slow sales and longer inventory hold times.

• Back Order Rate :
Shows percentage of products that needed to be back ordered due to high demand. (# customer orders delayed from Backorder) / (total of # orders) X 100

Back Order Rate = (# of Customers Orders Delayed from backorder / Total # of orders) x 100
Back Order Rate

Although having a high rate shows that you have a lot of demand, it could also mean you have insufficient data for forecasting demand planning and needs to be reevaluated. Lower rates usually indicate slow ordering cycle and possibility of high customer dissatisfaction.

• Days Sales of Inventory :
The DSI metric is used to determine efficiency of sales and the processes of managing inventory.

Days Sell in Inventory = (Average Inventory / COGS) x 365
Days Sales of Inventory

Days to Sell metric gives the general time period that inventory is converted into sales. High numbers tend to be inefficient whereas lower numbers shows that inventory is moving faster. Typically companies will want to sell inventory within the next 90 days before it starts costing more money.

•  Stock to Sales Ratio :
Or known as Inventory to Sales Ratio, is a metric that shows how efficiently the company is liquidating their inventory.

Stock to Sales Ratio = Monthly Stock Value / Monthly Sales Value
Stock to Sales Ratio

Stock to Sales Ratio shows that in order to increase Inventory turnover, the business must reduce the number of stock while increase their sales without increase inventory value. A good ratio to aim for is 5-10 for most industries which means that particular item is sold and replaced roughly 5+ times a year.

• Shrinkage (inventory loss/loss rate) :
The KPI is used to measure actuals of what items were recorded but not physically in the actual inventory.

Shrinkage = (Cost of Recorded Inventory - Cost of Physical Inventory) / Cost of Recorded Inventory
Shrinkage

A high percentage represents there might be discrepancies in your inventory that is outside of miscellaneous damages, etc. For example, if there is an issue with theft or vendor supply fraud, you will have a large difference in the percentage and should investigate the reasons why. In order to conduct this analysis, a physical count of the inventory is needed.


Extra:

Current Quantity: Product’s information regarding present capacity of the specific item.

Average quantity in a period: Total stock in and Stock out of products divided by the number of days researched.

Stock out Estimate in Days: Average or total amount of days that inventory was taken out from inventory.

Total Stock-in quantity: Number of items inputted as Stock-in for that product during the particular time frame.

Average Daily Stock in Quantity: Total amount of Stock-ins divided by number of days researched.

Average Daily Stock out Quantity: Total amount of Stock-outs divided by number of days researched.

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