Key Inventory Metrics to Monitor ….
Every business needs to monitor key metrics or key performance indicators (KPIs) that can easily be measured yet can quickly provide the overall direction of where the company is going, or if a part of the business may be going astray. Creating a dashboard of key industry metrics is critical to a company’s success. Keep it simple – don’t create an encyclopedia of metrics.
From a merchandising and inventory perspective, here are a few basic KPIs to monitor. Be sure that your metrics are clearly defined so everyone understands what the metric represents.
- Demand – measures the success of a campaign or offering and a key component of dollar response and average order values. The key to what we re-stock, or not!
- Fill Rates – initial fill and final fill, both from an order level and item level. (Order level fill is measured as an all-or-nothing and it aids the distribution center in projecting split rates, i.e. the number of packages per order). Item fill is a guide to inventory control to measure service levels and forecast accuracy. For example, a customer orders 3 items: two are in stock and one is on backorder. The order level fill would be 0%, however the inventory initial fill rate would be 67% which tells a different story. If the last item is ultimately shipped than both measures have achieved a 100% final fill
- Backorder Rates – initial satisfaction levels or out-of-stock levels when a customer called. Keep in mind that not everyone agrees to wait for a backorder and some will immediately cancel.
- Cancel rates – identifies customer dissatisfaction and lost sales.
- Return Rates – need to be measured not only from an inventory standpoint but to make sure that returns are being recognized and addressed. Here is another example of defining the metric. If you have 10 returns on 100 items shipped, that is a 10% return rate. Finance and distribution centers need to know that information in order to measure the cost of handling returns. In addition, if only 7 of the 10 returns are resalable, then inventory management needs to understand that the “return to good stock” rate was 7%, and will likely impact subsequent buying decisions.
- Overstock at Cost and Cost of Overstock – the former measures how much overstock is created, and the latter tells you the bottom line impact of the overstock. Knowing these can help in the open-to-buy budgets as well as how much overstock we can “safely” generate and still “liquidate” at above cost levels.
- Inventory Turns – this measures how quickly you are turning your inventory (i.e. how efficient you are to a just-in-time inventory) and thus has significant implication for cash requirements and inventory cleanliness.
So why look at these key inventory metrics on a regular basis? To highlight potential areas where your business may be going astray. For example, order fill rates reflect your customer service and potential customer satisfaction levels; item fill rates highlights your in stock levels; return rates could signify a sizing or quality issue; overstock signifies having too much of the wrong product which will reflect in lower inventory turns and impact cash flow, decrease the ability to sell the product you already own and increase carrying costs.
Remember, you can’t address or correct what you don’t monitor!