Business! every step you take in your business should be calculated and tracked. If you are not tracking it, you are doing it wrong.
Poor inventory management can be the absolute reason why your business’s efficiency is not the same as it was before.
But there is much more to inventory than just its basic definition. And managing it properly with metrics will lead to better-informed decisions that will positively impact your business.
Why should you track inventory metrics?
Inventory metrics help you measure and assess your performance and thus, give you some keys to improve it. They focus on a specific area and towards a specific goal. Also, they help you run your business with a more strategic and organized approach.
They help you drive the most effective behaviors, strategies, and decisions. They help in improving on-time deliveries, reduced operating costs, and optimized transport.
Here are the top 10 key inventory metrics you need to know and track:
1. Inventory turnover
This metric measures how many times a manufacturer’s inventory is sold and replaced in a specific period.
The inventory turnover ratio is a key metric for determining how efficiently you manage your inventory and generate sales from it.
It measures how fast a company sells inventory and analysts compare it to industry averages. Low sales mean weak sales, a high ratio means strong sales.
2. Inventory accuracy
To determine inventory accuracy, you can create a report based on the information in the accounting system. Make a list of inventory numbers, quantities, and locations for all items stored in the warehouse.
Next, conduct a physical count of each item listed in the inventory report. Then, divide the actual inventory counted by the inventory listed. The resulting percentage indicates the accuracy of inventory transactions.
Finally, review the percentages in the report to determine which percentage of accuracy is too low; then, complete additional review for those items that have a low accuracy rate.
Determining inventory accuracy metrics can be time-consuming if you don’t use automated processes.
3. Fill rate
Fill rate is essential to the order management process and is inherently customer-centric. It’s the percent of your orders that are shipped in full and on time on the first shipment as a percentage of all of your orders.
Also, it affects your relationship with your retailers.
This refers to the difference between the amount of stock that you have on paper and the actual stock you have available.
It’s a reduction in inventory which is not due to sales. The common causes of shrinkage include employee theft, shoplifting, and supplier fraud.
The formula for shrinkage is: Ending Inventory Value – Physically Counted Inventory Value
Shrinkage can also be expressed as a percentage — i.e. Shrinkage % = Shrinkage / Sales x 100
5. Inventory on hand
Inventory on hand is the number of items present in your warehouse physically. The products sold from inventory are still mentioned until the product physically leaves the warehouse.
So this number will usually be always higher than the actual availability of your inventory.
6. Cost per unit
The cost of purchasing/building a product, a company need is known as cost per unit. It is important to know the cost per unit for pricing the products.
7. Revenue per unit
The amount of revenue a product generates, divided by the total number of units of that product sold.
8. Gross Profit
It is the profit that a company makes after subtracting the cost of making and selling the products.
Gross profit = Revenue – Cost of Goods Sold
9. Gross Margin
It is the company’s total sales revenue minus its cost of goods sold, divided by total sales revenue. (Total sales revenue – the cost of goods sold)/total sales revenue).
10. Carrying Costs
Carrying costs are also sometimes referred to as the carrying cost of inventory or as inventory cost. It is the cost that resulted from holding and storing inventory.
This figure is used by businesses to evaluate the level of profit that can be expected in their current inventory. It is also useful in determining whether goods should be produced less or more so the business can stay on top of expenses and continue to generate a balanced income.
11. Product performance
Your top and lowest performing products should always be very well known to you, so track this metric regularly. Being fully aware of your product performance means you can stay on top of stock orders, merchandising, and sales, among other things.
What products should stock up on? Which items need promotion? The only way to answer these questions is to know your product performance clearly.
12. Average age of inventory
The average age of Inventory = (Your Average Inventory/The Cost of Goods Sold) x 365. This is how long it takes a company to turn its inventory into sales.
It is a measure of your inventory management efficiency. However, the average days to sell inventory varies between industries because of differences in the products and business models. Hence, it is important to compare the number to other similar companies.
13. Cycle time
Order cycle time refers to the time period between the placing of one order and the next order. It is the time period between the placement of two orders. The time period between the placing of an order and receiving it is the order lead time.
Order cycle time is = time during which demand is met+ time during which demand is back-ordered.
Therefore, the order cycle time is the time between two order fulfillment times.
14. Warehouse Productivity
To keep costs low and customer satisfaction high, your workers must be as productive as possible. Thus, measuring the performance of your warehouse operations is a key metric.
You should measure warehouse productivity by applying standard measurements for operations occurring across the warehouse. Because warehouse workers do not perform the same repetitive tasks each shift.
You need to be able to measure how long it takes staff to perform physical inventory in the same way that you measure placing goods in a picking area. An enterprise resource planning (ERP) system can calculate the length of time it takes to perform an operation.
15. Return on investment
Calculating your ROI is a good way of knowing your business performance. You will know how much profit you are making and how much of your profit you can use for reinvestment to make your business grow faster.
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
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