As the adage goes: you can’t measure what you don’t monitor. There isn’t much that’s more important to monitor than inventory management as a wholesaler or distributor.
Because profitability and margins are so closely tied to strong inventory management practices, it's imperative to measure inventory-related KPIs (Key Performance Indicators).
Inventory management software is critical to gathering the data needed to review KPIs. Ideally, look for a inventory management software platform that enables you to export data for further manipulation.
What are KPIs (Key Performance Indicators)?
KPIs are defined as quantifiable way to measure how well a company is meeting its strategic and operational goals. Or think of it as a way to measure the effectiveness of your overall strategy and the teams executing it.
How Often Should KPIs be Reviewed?
In addition to gathering and analyzing KPIs, review them on a regular basis. If glaring insights are uncovered, changes will need to made to the company’s overall strategy, management team or departmental objectives.
Many managers review their KPIs quarterly as a team and decide as a group what needs to change and how. Then, department team leaders or managers work to implement those changes in the next quarter until improvement is achieved.
Sometimes, managers and their teams will need to try new methods to see the outcome. Test, analyze and repeat are critical to this process. Furthermore, KPIs have little meaning if their value isn’t communicated to the teams helping to improve them.
For example, it should be communicated to everyone:
- How and what will be measured
- Everyone will be measured as as part of overall department goals
- Why inventory metrics matter to the company’s long-term success
- How each team performed quarterly and any forthcoming adjustments that will affect each team
10 KPIs for Inventory Management to Watch in 2019
1. Inventory Turnover Ratio
This number reflects how often inventory is sold and replaced within a predefined time period—typically a year. To calculate your inventory turn ratio, divide the cost of sales by inventory. It can also be calculated by dividing COGS (Cost of Goods Sold) by your average inventory.
2. Demand Forecast Accuracy
This KPI requires a review of how accurate your forecast was against actual sales. The less of a gap between what was forecasted and what was sold indicates that your demand forecasting is strong. The more accurate demand forecasts are, this inherently improves inventory turn rates and carrying costs. Be sure to ask sales teams to forecast future, expected sales within your CRM. This allows sales managers to view the pipeline at any given time, which in turn can be communicated to the right teams.
3. Holding Costs
Otherwise known as carrying costs, holding costs refer to the costs that result from storing and maintaining unsold inventory in your warehouse. Inventory maintenance costs usually include labor and the materials needed to keep the warehouse up and running. The cost of damaged and spoiled goods should also be included. Reduce holding costs by implementing a minimum stock level reorder point.
4. Average Number of Days to Sell Inventory
To calculate this metric, divide inventory by the cost of sales. This KPI measures the time between an item being stocked in the warehouse to the point when it is sold. In other words, it indicates the average time it takes to stock and then sell a given item.
5. Lead Time
To calculate lead times, add the sum of the time that it takes a supplier deliver an order after the order is placed. Add in the time that occurs between when another order is placed to keep stock in your warehouse. For vendors or suppliers with long lead times, it’s important to consider that as part of the minimum order quantity determined for each product.
6. Rate of Return
For this KPI, you’ll need to track the percentage of orders that are returned. Track why packages are returned to learn whether you need to correct product listings online or if it’s a product quality issue. If it’s a product quality issue, for example, consider dropping that line or SKU, especially if the cost of returns is outweighing the product margin, or profit on that item.
7. Gross Margins by Product
By sorting products from best selling to worst while cross-referencing margins, you’ll be able to see which items to consider raising margins on. If you have a best seller that isn’t margin-rich, consider raising the price on that item. Ideally, best sellers should also be margin winners.
8. Supplier Quality Index
This metric aids warehouse managers in monitoring how well vendors and suppliers are performing. For example, if there is an abundance of returns of product from a specific vendor, it may be time to source that product from another distributor or supplier. Or rate suppliers on how quickly you receive a shipment once an order is placed.
9. Perfect Order Performance
Whether your drop ship or receive orders in your warehouse, track how often your suppliers ship a perfectly correct order and on time. For the bottom percentage of those vendors not performing, it may make sense to source those products elsewhere. They might cost you customers through lagging or incorrect shipments.
10. Customer Satisfaction
Finally, a happy customer is a direct result of how well you are performing against your inventory KPIs. By shipping correct orders and on time, your customers will be happier and spread the word about your business. Include a short survey inside of shipments or email your customers one to determine how they feel about you. If sentiment is low, ask them what changes need to be made. You just might find the answer much quicker than perusing statistics.
While it can be overwhelming with where to start, choose three to five KPIs to begin tracking. Remember, it’s better to start measuring than not to measure at all. By tracking the ratings that matter to your business, you’ll inherently improve processes, profit and your long-term strategy, resulting in the growth you’ve been aiming for.
Ready to Track Your KPIs?
Tired of using inventory templates? Systum is the industry’s first enterprise-grade, affordable business platform that helps you run your wholesale, distribution or digital commerce business. Switch to Systum and optimize your operations, unify data and better serve every customer from one dashboard. If you’d like to learn more about how Systum can help you track inventory in real time, fill out the form below.