Having an excess of product can tie up valuable capital, but unexpected stockouts can send customers straight to a competitor. These are symptoms of a business operating without an understanding of its inventory.
Inventory metrics are the difference between guessing and knowing—the essential key performance indicators (KPIs) that provide real-time knowledge of your inventory management. These metrics can help you make informed decisions about inventory processes to enhance your company’s profitability and increase customer satisfaction.
Let’s take a deeper look at what these metrics are and how you can best track them to ensure your business is en route to maximum success.
What are inventory metrics?
Inventory metrics are quantifiable measures that evaluate the effectiveness of your inventory management. These metrics allow you to refine your inventory control and supply chain management strategies.
Without tracking these metrics, businesses risk incurring significant inventory carrying costs, lost sales due to low stock, and customer service issues arising from failing to meet customer demand. These metrics are key to answering questions like: Are we holding too much excess inventory? Are our inventory management processes efficient? Are we at risk of stockouts?
Sales and velocity metrics
Sales and velocity metrics focus on how quickly your inventory is moving and how well it meets customer demand. They help you assess the efficiency of your sales process and the product assortment’s effectiveness.
Inventory turnover ratio
Inventory turnover ratio is one of the most important inventory management KPIs. It shows how many times a business sells and replaces its inventory over a specific period. A high ratio indicates strong sales and inventory management. A low ratio might signal weak sales or overstocking.
Formula:Inventory turnover ratio = Cost of goods sold / Average inventory
Sell-through rate
This metric shows the percentage of inventory sold compared to the amount received from a supplier over a specific time frame. A high sell-through rate is a good sign that your products are in demand.
Formula:Sell-through rate = (Number of units sold / Number of units received) x 100
Days on hand
Days on hand (or weeks on hand) tells you the average number of days it takes to sell your inventory. A lower number is typically better, as it indicates a shorter cash-to-cash cycle—how long it takes to convert resources into cash flow.
Formula:Days on hand = (Average inventory / Cost of goods sold) x 365
Lost sales ratio
The lost sales ratio quantifies the revenue lost due to stockouts. It’s a measure of how well you are able to meet customer expectations.
Formula: Lost sales ratio = (Number of lost sales / Total potential sales) x 100
Cost and efficiency metrics
These metrics show the financial impact of your inventory, from the costs of holding it to the efficiency of your warehouse operations.
Inventory carrying costs
This is the total cost of holding inventory. It includes storage costs, insurance, taxes, obsolescence, and shrinkage. High inventory carrying costs can reduce your profits.
Average inventory value
This metric is the average monetary value of the total inventory a company holds over a specific period. Tracking average inventory value helps with financial planning and asset management.
Formula: Average inventory value = (Beginning inventory value + Ending inventory value) / 2
Cost of goods sold
Although it’s not a pure inventory metric, cost of goods sold (COGS) is an important component of many inventory formulas, especially inventory turnover ratio. It represents the costs of producing the goods sold by a company.
Unit labor cost
This measures the labor cost to process a single unit of inventory. It is an indicator of productive warehouse operations and helps identify areas for process improvement.
Formula: Unit labor cost = Total labor costs / Total number of units processed
Accuracy and quality metrics
Accuracy and quality metrics focus on the quality of inventory data and the accuracy of records, which are fundamental to all other metrics.
Inventory accuracy
Inventory accuracy measures the difference between your physical inventory count and the quantity recorded in your records. High inventory accuracy is important for accurate demand forecasting and avoiding stockouts.
Formula: Inventory accuracy percentage = (Counted quantity / System quantity) x 100
Inventory shrinkage
The inventory shrinkage metric represents the loss of inventory as a result of theft, damage, or administrative errors. It is a direct measure of your operational security and integrity.
Formula: Inventory shrinkage percentage = (Recorded inventory – Actual inventory) / Recorded inventory
Order picking accuracy
This measures the percentage of orders that are picked and shipped correctly, lacking any errors. It is an indicator of inventory management effectiveness.
Formula:Order picking accuracy percentage = (Number of orders picked correctly / Total number of orders) x 100
Strategic and performance metrics
These metrics provide a view of how inventory impacts your business strategy and customer relationships.
Inventory-to-sales ratio
This ratio compares the value of your total inventory to your sales over a period, indicating whether inventory levels are growing faster than your sales.
Formula: Inventory-to-sales ratio = Inventory value / Total sales
Customer satisfaction score
Although it’s not a direct inventory metric, it is heavily influenced by inventory performance. A low score can be a symptom of stockouts or delays caused by poor management of inventory. It’s a key piece of feedback for businesses that want to meet customer demand.
Inventory performance
This is a measure of how well your inventory management systems are working. It considers all the metrics above to provide a complete picture.
Best practices for tracking inventory metrics
- Integrate your systems
- Conduct regular physical audits
- Leverage automation
- Analyze trends to forecast demand
Simply tracking metrics isn’t enough. You need to analyze your metrics and apply your learnings to improve your operations. Follow these best practices for effective inventory planning and management:
Integrate your systems
Use an inventory management system or an enterprise resource planning (ERP) system that integrates with your sales channels, ensuring you have a single source of truth for inventory records. This also reduces the risk of errors and provides real-time data. A robust system will track your total inventory value, number of units, and the number that was sold automatically.
Conduct regular physical audits
No matter how sophisticated your software is, performing a physical inventory count on a regular basis is essential to maintain inventory accuracy. This helps identify and reconcile discrepancies, catch inventory shrinkage, and ensure your digital records reflect the actual inventory.
Leverage automation
Automating your inventory processes can help improve efficiency. Platforms like Shopify offer advanced tools to enhance operations. Shopify’s inventory management features allow you to set up notifications for when you’re low on stock. You can enhance things further with Shopify Flow, which automates stock level notifications to reorder products from a supplier when a certain threshold is met. This approach ensures you always have the right stock availability to meet customer demand and not lose sales.
Analyze trends to forecast demand
Look beyond the numbers and analyze them so that you can identify trends. Use historical inventory data to improve your accurate demand forecasting and anticipate future needs, optimize stock levels, and make better purchasing decisions.
Inventory metrics FAQ
What are inventory KPIs?
Inventory key performance indicators (KPIs) help determine the effectiveness of a company’s inventory management. They provide insights into performance across different aspects of the supply chain, from sales velocity to cost and accuracy. Inventory KPIs are vital for any business that wants to improve its inventory management and profitability.
What are the three key measures of inventory?
Although there are many important metrics, three core measures remain: inventory turnover ratio (when you sell and replenish your inventory), inventory accuracy (the difference between your physical count and your system records), and days on hand (average number of days it takes to sell your inventory).
How do you evaluate inventory performance?
To get a complete picture of inventory performance, track and analyze a range of important inventory management KPIs in different categories, such as sales, cost, and accuracy. Compare the results against industry benchmarks and your company’s historical performance. Then, identify the causes of poor performance (e.g., a low inventory turnover rate could be due to a poor mix of products, while high inventory carrying costs might signal overstocking).
