businessBusiness Coachingbusiness growthconsultantERPProcess Improvementsmall-businessUsing Inventory Metrics To Assess Your Business Performance

June 23, 2021by amybabashoff0

inventory control, inventory metrics, inventory, tracking, metrics

With steady substantial efforts and numerous resources required in supply chain management, it’s imperative to leverage inventory metrics to measure and assess the performance of the company.

What are Inventory Metrics?

Inventory metrics indicate the manner in which a business defines itself while providing insight into the stages of stock at each operation. The purpose of using metrics includes maximizing revenues, reducing costs, gaining competitive edge, while tracking performance objectives. With a real time evaluation of your inventory you can measure success and regularly adjust underperforming areas while ensuring optimal performance.

These are the top 10 Inventory Metrics you should be doing

Inventory Turnover

  • Inventory Turnover = Cost of Goods Sold / Average Inventory

Typically the most critical and renowned, this metric measures the number of instances inventory is sold within a period of time. Understanding this measure proves essential when determining the status of your turnover.

A low turnover may hint at several reasons why your inventory is not selling as desired-overstocking, obsolete goods, and product/marketing issues can all contribute to a lack of inventory movement.

On the contrary, high turnover may suggest potential loss in sales where stock is too low and/or inadequate. This can be due to underestimated demand or a rapid surge in popularity of your product.

Ideally, increasing inventory turnover and reducing holding time serves optimal for a variety of reasons. These reasons include reducing holding costs, increasing net income and profitability, and actively responding to the changing marketplace.

 

Gross Margin Percent 

  • Gross Margin Percent = (Sales – The Cost of Sales) / Sales

Using this equation in this method, you will find the percentage of the sales revenue that is gross profit.  By serving as a complementary factor to inventory turnover, you can visually pinpoint the weaker area and concentrate on improving it. (Weak gross margins=lack of inventory turnover.)

Furthermore, low gross margins may contribute to ample feelings of control for suppliers, allowing them to higher their prices. Through efforts of negotiation you can lower your cost of inventory by raising your gross margins.

Customer Order Fill Rate

  • Customer Order Fill Rate = Orders that are Shipped in Full / Total Number of Orders

As current customers continue to serve as your best source of income through their loyalty and word of mouth advertisement, it’s crucial to ensure their complete satisfaction. This formula shows you the percentage of orders customers receive on time. Ideally, you should be at 100%-any less will begin to invoke customers’ frustration while establishing future doubts about your ability to perform.

If your customer experience is less than perfect,  you may need to invest into software which can present live time inventory levels. (If you need help in determining the best one for your business, we can help!)

Cost Of Carrying

  • Cost of Carrying = Carrying Costs / Overall Cost

To determine the percentage of the cents per dollar per year spent on inventory, use this formula. Without an accurate value for carrying costs Notably, a low cost of carrying implies that inventory is cheap, and a lack of having an actual value indicates that you are purchasing more stock than necessary.

 

Average Days To Sell Inventory

  • Average Days To Sell Inventory = (Your Average Inventory/The Cost of Goods Sold) x 365

By using this formula, you will find the average length of time for a company to turn it’s inventory into sales. While a lower number is preferred, the average length of time to turn inventory into sales varies by industry, so it’s important to compare yours to similar companies.

Regularly read alongside inventory turnover, this indicator represents the process of turning your materials into cash.

Return On Investment

  • Return On Investment = (Sales / Average Cost of Inventory) x Gross Margin

To determine the amount you are earning for each dollar in your inventory, this metric serves most effectively when measuring for a specific area of goods. A number higher than 1 indicates that you are selling goods for more than you paid for, whereas a number less than 1 indicates you are selling them less than their total price.

Item Fill Rate

  • Item Fill Rate = Received Quantity / Ordered Quantity

Use this formula to measure the performance of order fulfillment for a single delivery or all deliveries within a certain time. Since a typical delivery order displays the name of each purchased product and quantity in its own line, it is referred to as a “line”.

Here it is suggested for a rate of 95% or above.

Cycle Time

  • Cycle Time = Actual Ship Date – Customer Order Date

Referring back to the importance of customer satisfaction, this system demonstrates the average time it takes from the moment an order is placed to the final delivery to that customer. Smooth and efficient processes will shorten the cycle time, where longer processes will affect the likelihood of your customer returning.

To reduce customer order time, start by reducing physical travel for the item by implementing organization within the warehouse for optimal travel and effective activity. Furthermore, ensure that you have a solid understanding of the expectations of your customers and implement software designed to prevent stock outs and prioritize reorder quantities.

Average Inventory Level

  • Average Inventory Level = (Current Inventory + Previous Inventory) / 2

To compare against overall volume of sales, this metric presents you with the average value of inventory throughout a specific time period. With supply and demand causing fluctuating inventory levels throughout the year, this shows the amount of inventory a business holds over the year.

This provides the ability to track inventory losses which may have occurred.

Inventory Accuracy

  • Inventory Accuracy = Regular Stock Takes

By using this formula, you can measure the accuracy of your inventory records to your physical inventory. Understandably, managing inventory is impossible without recognition of the amount in stock.

Here, at least 95% accuracy demonstrates effective inventory management.

To avoid the hassle of stock-outs, this metric is important.

 

In an increasingly competitive market curbing customer tolerance while raising expectations in delivery operations, now is the time to ensure sufficient inventory management with statistical measures of performance. If you find yourself encountered with an overwhelming roadblock of solving an issue in your supply chain, proceed with caution. The complexity and level of understanding involving this process recommends assistance from experienced professionals. Here at MCDA CCG, INC., we offer cost effective inventory management solutions-including software selection, supply chain management, cost analysis on inventory, and financial solutions to reduce or increase inventory as needed. Don’t wait for a problem to occur, avoid future consequences by gaining control now and contact us today.

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