Inventory Management KPIs Guide
Maintaining proper inventory levels requires a delicate balance between having a lot of product on hand and having a little.
This is why inventory management issues can often make or break ecommerce brands:
- Have too much stock and you’ll rack up storage costs and tie up cash flow.
- Too little, and you’ll run out of stock and miss out on potential sales.
In this guide, we’ll break down what inventory KPIs entail, why they matter, and which metrics are most valuable for you to track.
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What are KPIs?
Key performance indicators, or KPIs, are the quantifiable metrics companies use to gauge their progress toward a specific goal.
Why KPIs are important for inventory management
For inventory management, KPIs indicate how a retail brands’ stock performs and offers insights into costs of goods sold (COGS), inventory turnover, demand, revenue, internal processes, and more.
Ecommerce businesses can then use inventory analytics and metrics to operate more efficiently, optimise cash flow, and increase profitability.
You can easily track these KPIs in an inventory management system (IMS) or enterprise resource planner (ERP).
With the right technology solutions and processes, your internal team can quickly identify which initiatives will improve supply chain efficiency by reducing time and costs.
There are various benefits to tracking inventory management KPIs:
- Increased sales and revenues
- Improved customer satisfaction
- Enhance the company’s reputation
- Improved employee productivity
- Reduced costs
- Reduced supply chain issues
You can easily track KPIs in an inventory management system (IMS) or enterprise resource planner (ERP).
15 most valuable inventory KPIs to keep track of
There are infinite inventory KPIs you can track. But to avoid analysis paralysis, try to focus on the metrics that will actually move your business toward its strategic goals.
Not sure what those metrics are?
Below are 15 most valuable inventory management KPIs for retail brands, including insights on how to track and improve them.
At a glance, the most common inventory KPIs are:
|Inventory KPIs||What this tracks|
|1. Holding costs||How much it costs to store and protect unsold inventory|
|2. Stockouts||Which product offerings are currently unavailable|
|3. Lead time||How long it takes to receive orders from your manufacturer|
|4. Inventory accuracy||If your inventory records match your actual inventory levels|
|5. Inventory days on hand||How quickly you use up inventory levels on average|
|6. Safety stock||How much excess product you should keep on-hand in case of supply chain issues|
|7. Stock availability||How much inventory is currently in stock to sell|
|8. Inventory shrinkage||If your inventory records match your actual inventory levels|
|9. Dead stock||Which SKUs aren’t selling despite being in-stock|
|10. Inventory turnover ratio||If a brand has too much inventory for the demand|
|11. Backorder rate||How many orders a brand can’t fulfil when a customer tries purchasing it|
|12. Revenue per unit||How much you’ll make on average by selling one unit of product|
|13. Cost per unit||How much one unit of inventory costs to manufacture or supply|
|14. Stock to sales ratio||How healthy your inventory levels are|
|15. Order cycle time||How long it takes to fulfil customer orders on average|
Inventory holding costs
Inventory holding cost is the sum of all costs involved in storing and protecting unsold products. The lower this number is, the less it takes away from your net margins.
To calculate your inventory holding costs, use the following formula:
Inventory Holding Cost = (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory
To lower these costs, opt for a fair inventory storage solution. Renting one or more warehouses can be costly, which is why many ecommerce businesses partner with a fulfilment company that operates multiple fulfilment centre locations.
Doing this allows you to pay for the space you need and you won’t have to hire labour to manage a warehouse.
In addition to storage optimisation, you will want to keep your stock levels lean while avoiding stockouts. To do this, use your demand forecasts to place smaller orders more frequently, so you can receive inventory replenishment just before going out of stock.
Stockouts are inventory events where one or more SKU variants are unavailable. And they can frustrate customers and negatively impact conversion rates.
The best way to identify and avoid stockouts is by investing in an inventory management system with real-time tracking.
An inventory management solution can help you identify potential stockouts by tracking stock levels in real time, pull historical inventory data to forecast demand, and understand warehouse receiving timelines so you know how long it will take to order, receive, and position inventory.
Historically, when stockouts occurred, brands couldn’t sell inventory they didn’t have, and conversion rates crashed to zero. But by selling on backorder, you can see a marginal drop in conversion rates compared to when the product is in stock.
Production lead time is the amount of time between when a brand places a purchase order (PO) and receives that order from its manufacturer.
To calculate lead time, use the following formula:
Lead Time = PO Processing Time + Production Time + PO Fulfilment Time + Supply Chain Delays
Note: Typically, manufacturers require brands to place a down payment on the purchase order, which ties up cash in physical inventory you don’t have yet. So, the shorter your lead times, the better.
To shorten your lead times, be sure to take the time to source the right suppliers and manufacturers — find a local supplier, work directly with your source manufacturer, or consolidate vendors to reduce time spent coordinating POs.
Then, share your inventory forecasting insights with your manufacturers, so they can prepare. Many manufacturers will even prioritise your POs or offer a discount because they know you’ll be a repeat customer.
Inventory accuracy refers to inconsistencies between your inventory records and your actual inventory levels.
When these numbers are off, it’s usually an indication of a deeper problem like a recording error, order fulfilment error, or theft. And when left unaddressed, it can lead to inventory shrinkage and major inventory discrepancies.
To keep an eye on inventory accuracy, you have two options:
- Compare physical inventory counts with records of inventory on hand, which is known as “inventory reconciliation.”
- Use the valuation of your available inventory, then divide it by the value you’re supposed to have. However, this method is not as accurate.
Once you’ve checked your inventory number and addressed discrepancies, you’ll want to run frequent and random inventory checks to keep a pulse on it.
This can be time-consuming and labour-intensive — especially if your managing hundreds or even thousands of units on hand.
To increase inventory accuracy, there are two alternate courses of action: outsource this work to a 3PL like ShipBob or use an integrated ERP solution like Cogsy to keep real-time tabs on your inventory records.
Having the right technology and support can help you spend less time on inventory without compromising accuracy.
Inventory days on hand
Inventory days on hand measures how quickly a business turns over its inventory on average. In general, the fewer days a unit sits in your warehouse, the better. This way you don’t waste money holding on to inventory for too long.
When businesses accurately calculate days on hand, they can minimise stockouts by keeping their inventory levels lean and restocking just in time.
To calculate inventory days on hand, use the following formula:
Inventory Days On Hand = (Average Inventory For The Year / Cost Of Goods Sold) x 365
However, an operational planning tool with demand forecasting capabilities like Cogsy can take this KPI to the next level (especially in the short term).
Cogsy’s solution provides insights into other factors like sudden spikes in demand or longer lead times in your purchase order to ensure you restock the right amount at the right time.
Safety stock refers to any excess inventory a brand has on hand in case of a sudden uptick in demand or supply chain issues. This offers a level of insurance against stockouts when the unexpected happens.
In other words, safety stock is a way to cushion your inventory levels and ensure you don’t run out of product when your inventory forecast numbers didn’t align with demand.
To calculate how much safety stock you need for each SKU, use the following formula:
Safety Stock Needed= (Maximum Daily Usage x Maximum Lead Time) – (Average Daily Usage x Average Lead Time)
Stock availability refers to how much inventory a brand has in stock to sell. And not knowing this inventory metric at any time (or using outdated data) can drive up logistical costs and lead to profit loss.
Having inventory visibility is key. By tracking your inventory in real time using an inventory tracking solution, you’re given visibility into not only what you have in stock now but also records of previous inventory trends.
Many real-time inventory tracking systems also automate inventory audits so you can easily monitor inventory shrinkage.
Another advantage is having all the data you need at your fingertips to accurately forecast demand using present and historical data.
Inventory shrinkage refers to when a brand’s actual inventory levels are less than accounting has them recorded as. These inconsistencies usually indicate an accounting error, misplacements, product damage, or theft.
And for every unaccounted unit, you’re essentially throwing away money.
To calculate your inventory shrinkage rate, use the following formula:
Inventory Shrinkage Rate = (Recorded Inventory – Actual Inventory) / Recorded Inventory
You can improve this rate by monitoring inventory levels more frequently. However, this is manually demanding on your internal team.
To alleviate the stress on your team, you can outsource this to a 3PL like ShipBob (this will also increase security for your unsold inventory).
For example, ShipBob offers an advanced data and analytics reporting tool that helps merchants control stock levels and prevent inventory shrinkage.
“ShipBob’s analytics tool is really cool. It helps us a lot with planning inventory reorders, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.”
Oded Harth, CEO & Co-Founder of MDacne
Dead stock is any product that hasn’t sold and likely won’t ever sell. And holding on to it doesn’t make you money; it costs you money.
That’s because dead stock items occupy warehouse space that could otherwise house fast-selling products. As a result, they come with hefty holding costs (typically amounting to 30% more than the product’s value).
The most significant contributor to dead stock is inventory mismanagement. This is yet another reason why it’s crucial to implement an inventory management system to track which SKUs turnover quickly and which ones are just sitting.
Once you have a better idea of what items are slow-moving (or on the verge of becoming obsolete), you can proactively get rid of potential deadstock by offering a discount, offering it in a product bundle, or donating the items to get them off your hands.
Inventory turnover rate
Inventory turnover rate measures how many times a company sells through and replaces its inventory in a given time period (typically, a year). And it helps brands determine if they have too much or too little stock to meet demand.
To calculate inventory turnover rate, use the following formula:
Inventory Turnover Rate = Cost Of Goods Sold / Average Inventory Value = Number Of Units Sold / Average Number Of Units On Hand
Generally speaking, you want a turnover rate between two and four. Anything less than two means you have too much deadstock, and anything more than four indicates you’re at risk of a stockout.
And you can quickly improve your inventory turnover ratio by generating demand forecasts. These forecasts can then inform your operational plans, so you only buy inventory that will actually sell.
But if you turn inventory too quickly (especially if this rate improves consistently over time), then you’re not charging enough for your product.
Backorder rate measures the number of orders a brand can’t fulfil when a customer tries to purchase. And the rate indicates how well a company stocks high demand products.
To calculate your backorder rate, use the following formula:
Backorder Rate = Delayed Orders / Total Orders Placed
Ideally, you want this number to be as close to zero as possible. You can keep this rate down by having safety stock available, tracking inventory levels in real time, and setting a replenish point.
However, even with the best inventory planning process and system, supply chain issues or unexpected spikes in demand can put products on backorder.
When this happens, try selling on backorder to avoid missing out on revenue. Just make sure to set clear expectations with customers around when they’ll receive their order.
Revenue per unit
Revenue per unit measures the average earnings generated by selling one unit of inventory. And the higher the revenue per unit, the more a company makes off each sale.
By tracking this inventory KPI, brands can ensure profitability and project future revenue growth at a per-unit level.
To calculate average revenue per unit, use the following formula:
Average Revenue Per Unit = Total Revenue / Total Units Sold
One way to improve this KPI is to increase your product markup.
However, this might make your prices uncompetitive and drive customers away. So, a better option is to lower your cost of goods sold (COGS) and cost per unit.
Cost per unit
Cost per unit measures how much a brand spends to produce or source one unit of inventory. Tracking this KPI ensures your business remains profitable.
By tracking cost per unit, you can determine production inventory requirements, set product markups, and create volume discounts (which is especially important in wholesale deals).
To calculate cost per unit, use the following formula:
Cost Per Unit = (Fixed Costs + Variable Costs) / Units Produced
Fixed costs refer to any charges that remain the same, regardless of how much product you order, such as administrative expenses (insurance, employee salaries, and so on).
Variable costs vary depending on how much product you order, such as landed costs.
But this is a simplistic way to calculate the inventory KPI. Again, an IMS would extend on this to consider first-in, first-out (FIFO), last-in, first-out (LIFO), and standard cost. This gets you a more accurate cost per unit.
Either way, you can lower this KPI by nurturing your relationships with your suppliers. One way to do this is by submitting reliable, consistent POs. You can then use this predictability to negotiate better rates.
Alternatively, you can share your demand forecasts to show this same level of predictability. But you might need to commit to a minimum number of purchase orders to seal the deal.
Stock to sales ratio
Stock to sales ratio measures the health of your inventory levels by comparing how much inventory you have available to sell versus what has already been sold.
To calculate your stock to sales ratio, use the following formula:
Stock To Sale Ratio = Average Inventory Value / Average Sales Value
Generally speaking, retail brands want this ratio to sit around 4, which indicate you have enough stock available to avoid a stockout, but not so much that they’re racking up holding costs.
To improve this number (or make it easier to manage), track your inventory levels and sales orders in real time using an inventory tracking system.
Order cycle time
Order cycle time refers to the amount of time between when a customer places an order and receives that order. And it offers insights into the quality of a brand’s supply chain.
While tracking order cycle time on each order is helpful, brands typically prioritise average order cycle time. To calculate it, use the following formula:
Average Order Cycle Time = (Delivery Date – Order Date) / Total Orders Shipped
Generally speaking, the lower your average order cycle time, the more effectively your brand fulfils customer demand.
To cut down on your cycle time, partner with a 3PL like ShipBob that can distribute your inventory across several fulfilment centres.
That way, you can ship from the closest fulfilment centre to fulfil customer orders faster while cutting shipping costs.
“ShipBob has been a great ally as they have fulfilment centres all over the US, facilitating a 2-3 day delivery time for any customer in the US.”
Andrea Lisbona, Founder & CEO of Touchland
25 bonus KPIs to consider tracking
I’ll admit it.
This next group of KPIs isn’t technically all inventory-specific. But tracking KPIs shouldn’t end at the inventory level.
By setting KPIs for your entire fulfilment process (or even your supply chain as a whole), you can get a better picture of your brand’s operational performance.
Luckily, many KPIs you already track for other business functions might also be relevant to inventory management.
|Other important KPIs||What this tracks||Formula for calculating|
|Time to ship||How long it takes to ship an order once it’s placed||Delivery date – delivery time|
|Total units in storage||How much product you have in your inventory at a given moment||Count your total units in storage (Total units – Fulfiled units) *Note: If you use an IMS, real-time inventory levels are calculated automatically.|
|Average warehouse capacity used||How much of your storage space you’re actually using||Usable Space in Sq. Ft. * Maximum Stack Height in Ft. = Storage Capacity|
|Order picking accuracy||How many orders are packed without error||Total number of accurate orders picked / total number of orders picked|
|Undamaged delivery rate||How many orders are delivered without damage to the products||(Number of orders shipped in good condition / Total number of orders shipped) * 100|
|Average fulfilment cost per order||How much it costs to fulfil an order on average||Sum of shipping costs / number of orders filled within that time period|
|Gross margin return on investment (GMROI)||How much a company made off the inventory compared to what they initially invested||Gross margin / Average inventory cost|
|Cost of receiving per line||How much it costs to receive away a line item on a PO||Total amount spent on receiving / Total number of items in the receiving line|
|Put-away cost per line||How much it costs to put away a line item on a PO||Total cost of putaway / Total number of line items|
|Picking cycle time||How long it takes to pick and pack an order on average||Total time needed to pick item / Number of items picked|
|Average inventory||How much inventory you have on hand at a given time||(Beginning inventory + Ending inventory) / time period|
|Average days to sell inventory (DSI)||How long you keep inventory before it’s sold||(Cost of average inventory / Cost of goods sold) * Time period|
|Sell through rate||How much inventory you sell over a certain time period as a percent of inventory received from manufacturer in the same time period||(Number of units sold / Number of units received) * 100|
|Rate of return (ROR)||Rate at which shipped items are returned||(Number of units returned / Number of units sold) * 100|
|Demand forecast accuracy||How accurate your forecast for customer demand is||(Actual demand – Forecasted demand) / Actual demand * 100|
|Put away time||How long it takes to put away a single item of inventory||Total hours used for put away / total hours for the warehouse operation|
|Lost sales ratio||How much revenue is lost after a stockout||Average demand – Actual sales|
|Perfect order rate||How many orders are shipped without incident||(Percent of orders delivered on time) * (Percent of orders complete) * (Percent of orders damage free) * ( Percent of orders with accurate documentation) * 100|
|Fill rate||How many orders are shipped from available stock without any lost sales, backorders, or stockouts||(Total orders shipped / Total orders placed) * 100|
|Labour cost per item||How much you pay workers to produce one unit||Labour hourly rate * Labour hours required to complete one unit|
|Labour cost per hour||How much you pay workers per hour||Gross wages + Expenses such as annual payroll taxes and overhead) / Hours worked per year|
|Receiving efficiency||How productive receiving area employers are||Inventory received / Hours worked|
|Customer satisfaction score||How happy customers are with your service and product||(Positive responses / total responses) * 100|
|Customer retention rate||How many customers you retain over a certain time period||[(Customers at the end of the time period – Customers gained within the time period) / Customers at the beginning of the time period] * 100|
How to choose inventory KPIs to track
Set SMART goals
Thinking about SMART goals may transport you back to your grade school days when you first learned about goal setting. However, this system of tracking objectives is tried and true.
Setting SMART goals helps you strategically work toward the goals you want to meet. Focus on these 5 criteria when setting your inventory KPIs:
- Specific – clearly state your goals and what you want to achieve
- Measurable – define what evidence will determine you’ve met your goal
- Achievable – choose goals that are attainable for your business and team
- Relevant – set goals that align with your long-term strategy and objectives
- Time-based – state a timeframe for your goal to be achieved
Avoid vanity metrics
As seen above, there are a lot of metrics you can track to keep a finger on the pulse of your inventory. However, focus on the ones that really matter.
Vanity metrics can be easy to track or make your stats look great, but they don’t add value to your operation or help you scale.
Answer business questions
When you’re choosing which inventory KPIs to track, make sure they are answering the questions you want to know.
If you find that your business regularly faces a particular issue, measuring KPIs can help get to the bottom of why. For example, if you frequently have stockouts, you may want to revisit your safety stock level and determine a better, more accurate reorder point for your business.
Keeping a close eye on your inventory KPIs helps you better understand your business and how it’s doing. This way you’re able to manage issues before they occur. For example, if you notice that your holding costs are going up, you can dig in to determine what’s causing the increases.
Include customer-related metrics
It’s as important to understand your customers as it is to keep track of your inventory. Measuring your customer’s satisfaction or the amount of customers you retain gives you an idea of customers in your network. Making sure your customers are happy with your service and product means they’ll likely become loyal, repeat shoppers.
Tracking KPIs shouldn’t be difficult
Historically, tracking these inventory management KPIs once were time-consuming, labour-intensive, and needlessly complex. But not anymore.
Today, setting and tracking KPIs for your inventory can be easy with the right inventory management software in place (like ShipBob’s fulfilment software). That way, you can get the insights you need in real time.
How Cogsy + ShipBob make tracking and improving KPIs simple
With unreliable supply chains and unprecedented consumer trends, retailers are operating on uncertainty.
That’s why ShipBob and Cogsy have partnered together to turn demand forecasting into an exact science and provide the clarity you need to unlock future growth.
ShipBob’s centralised, real-time dashboard allows you to easily view your most important inventory KPIs. The dashboard coupled with operations optimisation tool, Cogsy, you get is a proactive plan that’ll unlock revenue growth.
You’re able to track and measure inventory management KPIs with information on average metrics ShipBob commits to (e.g., how long it takes to fulfil an order, receive inventory, etc.). With this integration, you can:
- Automatically sync your sales history, POs, and product information.
- Get deeper insights into your inventory trends.
- Easily create new POs based on past sales trends.
- Have accurate delivery dates for backorder items.
With Cogsy, you can turn ShipBob’s data reports into:
- Optimised POs (all you have to do is check and submit) with automatic replenish alerts.
- Accurate demand forecasts using real-time inventory levels and past trends.
- Sustainable operational plans to hit your most audacious revenue goals (with the power to effortlessly pivot when needed).
- The ability to sell on backorder when stockouts occur, so you never miss a sale.
- And lots more!
As a result, the ShipBob and Cogsy integration creates a powerful source of truth so you can track all your inventory management KPIs and know exactly how to leverage those insights to improve your operations and grow your brand.
Learn more about ShipBob’s integration with Cogsy or connect with the ShipBob team for more information.
To dive even deeper into inventory management KPIs, read this article on the Cogsy blog. For more information about Cogsy, visit their website at Cogsy.com.
Inventory management KPI FAQs
Here are answers to common questions about inventory KPIs.
What are KPIs?
Key performance indicators (KPIs) are the quantifiable metrics companies use to gauge their progress toward a specific goal.
For example, inventory KPIs allow businesses to scale what’s most likely to drive results and improve inventory management processes that need it most.
What are the most important inventory KPIs?
The most important inventory KPIs are the ones that offer insights into costs, turnover, demand, revenue, process, and supply chain efficiency. Brands can then use these insights to operate more efficiently and increase profitability.
What KPIs does ShipBob track?
ShipBob allows businesses to easily track their most important inventory and fulfilment metrics (including transit times, stockouts, and more) in their analytics dashboard.