7 Inventory Management Metrics to Track and Improve Business Operations
Businesses can make better strategic decisions by establishing key performance indicators (KPIs) to monitor inventory management. Tracking the right metrics enables businesses to improve cash flow and lower operating costs while also providing world-class services to customers.
However, if you are new to measuring inventory performance deciding which metrics to prioritize can be a daunting task.
The metrics you’ll need to examine will depend on the type of business you ran. For example if you are a high-tech retailer, your metrics will look different from those of consumer products retailers. So first, you’ll need to identify your key business functions and examine how you bring value to the customer.
What to Consider When Choosing Inventory Management Metrics
Before deciding on the KPIs to track, keep in mind that your choice will have a significant impact on your operations. Inventory metrics can have an impact on how everyone performs their duties.
As a result be sure to select metrics that encourage collaboration rather than escalating competition among employees and departments. That way, you can keep everyone focused on the same goals.
While it is easier to collect metrics for existing efficiency, it is more difficult to collect metrics for increased effectiveness. However, the latter is more beneficial to your company.
Don’t settle for metrics with too broad a scope because they won’t provide you with actionable insights. Make your key performance indicators (KPIs) SMART (specific, measurable, achievable relevant and timely).
Be wary of vanity metrics, which while making a specific department or process appears to be performing well, do not provide useful insights into the effectiveness of your inventory management performance.
Make sure to choose inventory software with an easy-to-use and customizable dashboard so you can effectively manage your metrics. Also, make it a habit to track and communicate your metrics across the organisation. Also create a graph that can show to representatives the significance of these vital bits of information and what they exclusively mean for execution.
Key Inventory Management Metrics
1. Demand Forecasting Accuracy
It is essential to understand how your demand forecasts perform against real demand so you can fill any gaps. This metric also relates to your inventory conveying costs, which are one of the important elements of inventory management effectiveness.
An accurate demand forecast implies you are less likely to order excess inventory. Increased accuracy will also enable you to respond quickly when it is necessary to arrange more stock than expected and it helps to grow your business.
2. Perfect Order Performance
This measurement demonstrates how viably are you conveying finished, precise and harm-free requests to clients. Components making up a “Perfect order” include:
- The percentage of orders delivered on time
- The percentage of completed orders
- The percentage of damage-free orders
- The percentage of orders with accurate documentation
This metric is often measured in terms of net promoter scores or NPS.
Customer satisfaction levels should be evaluated across both distribution and selling channels and NPS score should be determined for each of these, independently, this empowers organizations to check and file client order-to-delivery times to check if they are as they should be, as an example.
There is a big difference between customer services that are merely good and those who offer world class services to customers.
4. Inventory Turnover
This measurement estimates the occasions the stock is sold and supplanted-for example- “turned over”- in a specific period. It is a good measure of overall business efficiency. Higher turnover means greater efficiency.
Notwithstanding, this doesn’t mean that having a slower turnover is always an indicator of inefficiency. If you sell higher ticket items, they may spend more time on the shelf. But still makes a good profit for your business.
5. Out of Stock
“Stocks Outs” identify with the recurrence of stock demands that happen without stock is accessible.
This can affect the whole inventory network and is baffling for clients who need to wait until an organization re-stocks their mentioned things. In that capacity, this can hugely affect client reliability. Reasons for out of stocks incorporated helpless stocks administration or machine breakdowns or a break in the recharging request measure.
Calculate the recurrence of “stock-outs” by estimating the measure of stock that can’t be provided on a daily, weekly, monthly or annual sales volume basis.
6. Order Cycle Time
The Order Cycle Time (OCT) metric measures the average time required to satisfy the order.
This inventory management metric sometime termed order “lead time” which estimates the time from when a customer places their order to the point of their receiving it.
OCT reflects the effectiveness of your inventory management processes from a supply chain, production and fulfillment perspective.
Organizations with shorter OCTs are responding better to customer orders, while those with longer lead times might be encountering client disappointment and getting seriously distraught.
In the event that you have proficient frameworks set up around how you plan and interact with orders, you will see better outcomes here.
7. Carrying Costs of Inventory
These include many overhead expenses of stocking items in a warehouse. They include:
The cost identified within purchasing stock, a premium on working capital, and the opportunity cost of putting away cash.
Including protection, IT equipment, security and the cost associated with taking care of products in a distribution center
These expenses incorporate lease of the distribution center, any home loans on the property, and upkeep costs including heating, and lighting or air conditioning.
Identified with the expenses of covering things that become obsolete, shrink or lose value while stored
Stock conveying costs are determined by adding up the overhead expenses and isolating this by the normal yearly stock expense. This will give you a rate normally between 15 to 20%
Executing more effective distribution center and stock administration cycles will improve your conveying cost KPIs.
While the past rundown of measurements may appear to be overwhelming, you don’t need to carry out every one of them immediately. In case you're new to stock administration, think about beginning with stock turnover. This is a moderately simple measurement to follow and will give you a decent sign of how well your stock is performing against deals.
By including measurements that suit your business necessities and following them over the long haul, you'll begin to see designs that will assist you with improving your stock administration measures. This will empower you to improve activities and become a more effective association.
Similarly as you monitor your advancements in your 2020 retail schedule, following your stock administration measurements will turn out to be natural.
To gather precise information without unnecessary manual information, it's imperative to utilize legitimate stock administration programming. This can help you monitor your inventory process and usage, as well as purchase orders and useful metrics around the flow of inventory.
The advantages of a distribution center administration framework couldn't possibly be more significant in retail activity. They contribute to you the capacity to watch out for stock, dispatching, returns, request, and security. They likewise help to diminish human errors and boost effectiveness.
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