Good inventory management is essential to running a successful business. But stats suggest this is an area that many retailers are struggling to get a good grasp on:
- 34% of businesses have shipped an order late due to accidentally selling a product that was not in stock.
- Global inventory distortion (shrinkage, stockouts, and overstock) costs businesses an estimated $1.1 trillion annually
- The demand for inventory management software has doubled over the past five years.
But there’s one full-proof way to prevent that can cost you dearly; spotting them before they start having a serious impact on your business.
How? Monitoring key inventory KPIs (among other retail metrics) helps you to identify in real time how your business is performing.
In this post, we’re going to look at the 12 inventory KPIs that are most important for retailers to track.
12 Inventory KPIs that your business should be tracking
Ready to start tracking your inventory KPIs? Start with the following.
1. Gross Margin Percentage
What is the Gross Margin Percentage?
Gross Margin Percentage is a calculation of a retailer’s high-level financial position. It measures the revenue left over once the Cost of Goods Sold (COGS) has been subtracted from total product sales.
Why you should measure Gross Margin Percentage
Gross Margin Percentage is a simple inventory KPI way of measuring profitability over a defined time period. Unless you understand your gross profit margin, it’s impossible to know how well your business is performing.
How to measure it
Gross margin percent = (total revenue – the cost of goods sold) / total revenue x 100
2. Inventory turnover
What is inventory turnover?
Inventory turnover refers to the number of times a business sells out and replaces its stock over a defined period of time.
Why you should measure inventory turnover
Stock turnover expresses how fast your inventory is moving, which indicates the strength of your stock levels. High stock turnover is a sign of strong sales activity, but could also mean that you have insufficient stock to meet demand. Slow turnover can suggest weaker sales or excess stock that’s slowing down movement.
How to measure it
There are a couple of different ways that businesses can calculate stock turnover:
- Cost of Goods Sold / Average Inventory
- Sales/stock
3. Days on Hand
What are Days on Hand?
Days on Hand (DOH) is a more specialized method of measuring inventory turnover on a daily basis. DOH tells businesses how long on average it takes for stock to convert into sales.
Why you should measure Days on Hand
As a stock KPI, Days on Hand tells you how much inventory liquidity your business has. The slower DOH is, the more effectively a company is managing its stock and is less likely to run into issues with dead stock. However, there are some exceptions. For example, any retailer will deliberately hold onto higher amounts of stock when supply is uncertain.
How to measure it
Days on Hand = Stock / Cost of Sales x 365
4. Stock-to-Sales Ratio
What is Stock-to-Sales Ratio?
Your Stock to Sales Ratio is the amount of stock you have on hand versus the amount sold. This inventory KPI helps you to understand whether your inventory levels need adjusting.
Why you should measure Stock to Sales Ratio
Having either too little or too much inventory is very problematic for your business. Too much inventory means tying up a lot of capital, while too little can cause you to miss out on valuable sales opportunities. The lower your ratio is, the more effectively your business is allocating inventory.
How to measure it
Stock to sales ratio = stock value / sales value
5. Sell-through Rate
What is Sell-through Rate?
Sell-through Rate is a measure of stock sold versus the amount you’ve purchased from the manufacturer or wholesaler. Sell-through Rate is an important inventory KPI for telling you how quickly this investment converts into revenue for your business.
Why you should measure Sell-through Rate
By knowing how quickly a certain product is selling, you can gauge consumer demand and know how many units you require. This enables you to avoid necessary discounting that affects your profit margins.
How to measure it
Sell-through rate = (units sold / units received) x 100
6. Rate of Return
What is the Rate of Return?
Put simply, your Rate of Return is the percentage of orders that customers end up returning within a defined time period.
Why you should measure the Rate of Return
Returns equal lost revenue to your business, so it’s vital that you’re tracking how returns fluctuate over time to identify the underlying causes.
What is considered an acceptable return rate will vary depending on the nature of your business. For example, clothing retailers can see return rates as high as 40%, while a category like electronics generally sees much lower return rates.
How to measure it
Rate of Return = Returned items / total number of items sold x 100</em>
7. Perfect Order Rate
What is the Perfect Order Rate?
The perfect Order Rate refers to the total number of orders which meet the following criteria:
- On-time delivery
- Correct delivery location
- Correct items in the order
- No damage to items
- Correct documentation
Why you should measure Perfect Order Rate
When all of the above criteria are present in order, this indicates high customer satisfaction and a high likelihood of repeat purchases. In the reverse, a low Perfect Order Rate could result in worsening customer churn due to poor delivery experiences.
How to measure it
Perfect Order Rate = (Percentage of orders delivered on-time) x (percentage of correct delivery location) x (percentage of correct orders) x (percentage of undamaged orders) x (percentage with correct documentation)
Note: The above calculation refers to the Perfect Order Rate as described above, but businesses can substitute any criteria that are relevant to their operation.
8. GMROI
What is GMROI?
Gross Margin Return on Investment (GMROI) measures how effectively your business is turning stock investments into gross profit. The higher GMROI is, the higher the profit margins on your stock levels.
Why you should measure GMROI
GMROI helps merchants to understand whether they’ve struck a good balance between the cost of acquiring inventory and profit margins. When your GMROI is out of whack, it could result in your business making a loss.
How to measure it
Gross Margin Return On Investment = gross margin / average inventory cost
9. Average Inventory
Average Stock refers to the amount of inventory your business has on hand during a defined time period. The purpose of this stock KPI is to ensure that your business is maintaining a steady flow of inventory, without sudden drops or spikes in supply.
Why you should measure Average Stock
When you have reliable stock levels, your business can both meet consumer demand and not be saddled with excess inventory that’s difficult to shift. If you don’t need to worry about stockpiling inventory due to supply issues, this allows you to focus on other areas of your business.
How to measure it
Average inventory = beginning stock + ending stock / 2em>>
10. Lead time
What is Lead time?
Lead time is the time it takes for a customer to receive their order after placing it. A long lead time indicates bottlenecks in the fulfillment process, while short lead times are a sign of streamlined workflows.
Why you should measure lead time
Lead time is an important inventory KPI because it measures how responsive your operation is. If lead time is longer than it should be, this is a sign of problems in the supply chain that are adding unnecessary time to order processing. The longer it takes for customers to receive their orders, the more customer satisfaction is impacted.
How to measure it
Lead time = order process time + production lead time + delivery lead time
11. Holding costs
What are the holding costs?
Holding costs refer to overheads created from storing and servicing your unsold inventory. This includes:
- Storage
- Utilities
- Insurance
- Labor
- Obsolete inventory
Why you should measure holding costs
When your holding costs are high, this affects the profit margin of each sale. Since it isn’t always possible to ‘bake’ carrying costs into your product prices, this is a key inventory KPI to help you identify where holding costs can be rationalized to increase profitability.
How to measure it
Holding costs = total storage/service costs / total inventory value x 100
12. Inventory shrinkage
What is stock shrinkage?
Stock shrinkage refers to the amount of shock that retailers have on hand versus what their inventory system says is present. Inventory shrinkage occurs for a variety of reasons, including theft, damage, or inaccurate stocktaking.
Why you should measure stock shrinkage
Some causes of shrinkage are difficult for your business to avoid, so it’s important to account for the extra stock you’ll need to prevent yourself from running out – without resulting in excess inventory.
How to measure it
Inventory shrinkage = value of ending inventory – the value of physically counted inventory
Optimize your inventory management by staying on top of the right KPIs
Stock KPIs play an important role in ensuring that retailers stay on track and identify operational issues that affect profitability. By tracking the health of your catalogue strategy, businesses can prevent revenue from leaking away from inefficient processes and improve customer satisfaction — one order at a time.
For best results, choose a 360-managed solution that can help you with in-store marketing, and selling and simultaneously check your stock levels so your products are always in the catalogue both on our marketplace and across participating stores. BWBMart lets you focus on your business while we take away the hard stuff of attracting buyers to your products both online and offline and to your own doorstep. Learn more.
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