Metrics and KPIs help you monitor your inventory, sales performance, purchasing and more. Based on this data, you can make effective decisions about your stock. Measuring inventory metrics helps you evaluate your performance and see the impact of adjustments you make to your processes, inventory and sales strategies.
Consider this your master list of metrics – there’s more here than you can reasonably track at once. Get together with your management team and select the top five to seven metrics for each functional area. These are the most important indicators of your performance that you’ll measure over time.
What are metrics?
Metrics are quantifiable data you can monitor to track performance across the business. Once you start tracking metrics, you’ll have a baseline that you can compare to in the future. Over time, your metrics help you evaluate improvement as you adjust.
What are KPIs?
KPIs (key performance indicators) are the most important metrics to your business. These will be a subset of metrics that have the biggest impact on your business health and growth. Typically, KPIs will have a predetermined goal that you’re trying to achieve. It’s something you’re actively working toward to achieve your business objectives.
Customer and Sales Metrics
1. Inventory Turnover Rate
Inventory turns measure how often products are sold and replaced over a period. It’s usually measured over the year, but it can be useful to look at it quarterly as well.
A high turnover indicates that products are moving off the shelves quickly and sales are up. Most wholesalers aim for 9 turns per year, but best-in-class businesses hit around 7.3 turns according to APQC.
Turnover rate = cost of goods sold / average inventory
2. Days on Hand
Also referred to as days to sell inventory (DSI) or average age of inventory, this metric indicates how many days it takes to sell a product.
The lower the number is, the better you are at selling. But dropping too low can put you at risk for stock-outs.
A higher number indicates you have old inventory, which costs more to store. If you sell products that become obsolete quickly (like electronics), aging inventory is an important metric to watch so you aren’t stuck with inventory you can’t sell.
Days on hand = (average inventory for period / cost of sales for period) x 365
3. Sell-through Rate
Sell-through rate demonstrates how efficient your supply chain is.
Sell-through rate = (# units sold / # units received) x 100
Stock-outs is an important metric to understand how often inventory is unavailable when a customer places an order.
Stock-outs = (# items out of stock / # items shipped) x 100
5. Backorder Rate
Like stock-outs, your backorder rate indicates the percent of orders you don’t have inventory to fulfill. The difference here is that backordered products have a determined date of arrival – it might take extra time, but the customer will receive their order.
Backorder rate = (# delayed orders due to backorders / total # orders placed) x 100
6. Return Rate
Tracking return rate by customer and product can offer insight into customer satisfaction. If your return rates go up, you’ll want to know why. It can also be useful to compare return rates of similar products. For example, if you have a return rate of 30% for a size small sweater, but the return rate on mediums and larges for the same style is only 10%, there’s clearly an issue with the smalls.
Return rate for product = value of product returned / total sales
7. Service Level
Service level tells you how many customers don’t experience stock-outs. This metric can help you strike the right balance between excess inventory costs (as you stock more to meet demand) and stock-out costs.
Service level = (# orders delivered / # orders received) x 100
8. Sales Revenue
Sales revenue (also called product sales) tells you how much income you’ve generated from sales, minus returns, discounts and allowances. You can also break this down by sales channel to understand performance at a more granular level. This is particularly important if you’re entering new channels, like eCommerce.
Sales revenue = gross sales revenue - sales returns - discounts - allowances
9. Revenue per Unit
Revenue per unit tells you how much one unit of product is worth.
Revenue per unit = total revenue for period / average units sold for period
10. Cost per Unit
Cost per unit is an important metric for companies that manufacture or sell large amounts of the same product. It tells you how much a single unit costs to produce or buy.
Cost per unit = (fixed costs + variable costs) / # units produced
11. Gross Margin by Product
Gross margin by product is the amount of money you keep for each dollar of sales. It removes any costs from producing the item.
Benchmarking data shows that competitive distributors have an overall gross margin of 17.9%, compared to best-in-class businesses at 24.2%.
Gross margin by product = [(net sales – cost of goods sold) / net sales] x 100
12. Gross Margin Return on Investment
To understand how much you’ve made compared to your inventory investment, use the gross margin return on investment metric. Essentially, this measures how efficiently you buy and sell product. You want to aim for greater than 1, but the higher your gross margin return on investment, the greater your profitability and inventory efficiency.
Gross margin return on investment = gross margin / average inventory cost
13. Net Promoter Score (NPS)
Net promoter score helps you measure customer satisfaction. There are a couple different ways you can approach this.
You could develop a simple 5-question survey that you send to customers once a quarter or collect responses on sales calls.
Or you could ask one question: How likely are you to recommend our company to a friend? This method is particularly easy to implement on your eCommerce site if you have one.
The key is to use a consistent process, track the data in your system and analyze it.
NPS = % promoters - % detractors
14. Customer Churn Rate
If you sell products on a subscription basis, you’ll want to measure your churn rate to see how many customers you’re losing. Keep in mind that this calculation treats all customers the same, regardless of how long they’ve been with you. Losing a customer after one month has a lesser impact than losing one that you’ve had for two years. It might make sense to calculate churn for customers less than a year old separately.
Customer churn rate = 100 * customers lost in a period / (customer at start of period + customers gained in period)
15. Average Order Value
Average order value helps you understand the size of each order. This is an important metric to track as you diversify into multiple sales channels. For example, is your eCommerce average order value higher or lower than direct sales? Comparing the values can help you adjust your sales efforts appropriately.
Average order value = total revenue / number of orders
16. Lost Sales Ratio
The lost sales ratio is the number of days a product is out of stock, compared to the expected rate of sales. It tells you when you’re running too lean on stock.
Lost sales ratio = (# days product is out of stock / 365) x 100
Demand Planning and Procurement Metrics
17. Forecast Accuracy
Forecast accuracy tells you how close the actual sales were to the forecast that you used for demand planning. If sales and forecast are the same, you’ll have a forecast accuracy of 1. If you use your data properly, your forecasts should get more accurate over time. But you can still expect to see some minor fluctuations – sometimes you’ll sell more than expected, sometimes less. But over time, it generally averages out.
If your forecasts are consistently too high or too low, you’ll want to investigate to determine the reason. It could be as simple as one or two salespeople that consistently overestimate.
Forecast accuracy = 1 – (actual sales – forecast) / actual sales
18. Average Lead Time
Average lead time indicates how much time it will take for a customer to receive a product after they order it. It takes into consideration your order processing time, production lead time (if you’re a manufacturer) and the delivery time.
Lead time = order process time + production lead time + delivery lead time
19. Order Fill Rate
Order fill rate indicates the number of orders you could fill immediately with stock in the warehouse. If you can’t fill all orders, you can use this metric to decide whether you partially fill orders for some customers (so everyone gets something) or backorder full orders.
Order fill rate = 100 * orders filled from existing stock / total orders
Warehousing and Fulfillment Metrics
20. Time to Receive
Time to receive measures the efficiency of your stock receiving process – how long it takes staff to bring in and prepare new stock.
Time to receive = time for stock validation + time to add stock to records + time to prep stock for storage
21. Putaway Time
Putaway time is a metric that closely follows time to receive. It measures the time it takes to store the received inventory in the proper location in your warehouse.
Putaway time = total time to stow received stock
22. Picking Accuracy
Picking accuracy shows how many orders are picked correctly by your warehouse team. While all distributors aim for 100%, it’s not realistic to achieve. As you adjust your picking processes, keep in mind that improving accuracy can decrease throughput. Measure a baseline throughput rate before you implement any corrective actions so you can evaluate the impact on both metrics.
Picking accuracy = 100 * error free picks / total picks
23. Perfect Order Rate
Perfect order rate is how many orders you ship without any issues (damage, inaccuracy or delays). A high perfect order rate leads to higher customer satisfaction. Top performing companies have a 95% perfect order rate, with the worst coming in at 82%.
Perfect order rate = [(# orders delivered on time / # orders) x (# orders complete / # orders) x (# orders damage free / # orders) x (# orders with accurate documentation / # orders)] x 100
24. Order Cycle Time
Order cycle time is the average time it takes to fulfill a customer order. It shows how well you meet demand, including fulfillment efficiency, shipping and delivery.
Order cycle time = (time customer received order – time customer placed order) / # total shipped orders
25. Inventory Shrinkage
Inventory shrinkage is the amount of inventory you should have on-hand but can’t account for. Typically, shrinkage is the result of theft, damage, miscounts or fraud. It represents lost revenue opportunity, so it’s an important metric to track, particularly if you have high value inventory.
Inventory shrinkage = ending inventory value – physically counted inventory value
26. Average Inventory
Average inventory is the amount of inventory on-hand at any point in time. The goal is to keep this metric consistent over the course of the year.
Average inventory = (beginning inventory + ending inventory) / 2
27. Inventory Carrying Cost
Your inventory carrying cost demonstrates the total cost associated with holding inventory in your warehouse. It includes rent, warehouse maintenance / utilities, shrinkage, leakage and obsolescence. The more inventory you keep in stock, the higher your carrying costs will be, particularly if it’s slow-moving stock.
Inventory carrying cost = [(inventory service costs + inventory risk costs + capital cost + storage cost) / total inventory value] x 100
28. Dead Stock / Spoilage
Dead stock is inventory you have in stock that isn’t being sold to customers. Spoilage is similar, but for perishable items that don’t sell because they’ve expired (like food items). Given that you may have to write this stock off, you want to keep it below 30% – anything higher and you won’t be competitive. Note that there’s a variable component to this calculation – you’ll need to decide at what point stock is considered dead or spoiled.
Dead stock / spoilage = (amount of unsellable stock in period / amount of available stock in period) x 100
29. Available Inventory Accuracy
Available inventory accuracy is the difference between the number of items in your inventory system and the physical count. Discrepancies can be due to theft, breakage, fraud and loss. It’s important to watch for major changes in this metric and investigate ASAP.
Available inventory accuracy = (# counted items that match record / # counted items) x 100
Best Practices for Inventory Management Metrics
A few tips to help you measure the metrics you’ve picked from this list.
Select five to seven metrics per functional area (any more than that will be too much).
As you set goals for your KPIs, make sure they’re within reach.
Evaluate your processes to make sure they support your metrics.
Review your metrics and KPIs a couple times a year to make sure they’re still useful.
Create a dashboard to track performance.
Make sure you have clean, reliable data – that’s the key to getting reliable metrics!
The right systems support both your ability to track metrics and make the necessary improvements to your processes.
As an ERP partner, we talk to many small and mid-size distributors about the challenges they’re facing in their business. One of the common threads is the need for better reporting and visibility. While they might know what metrics they should be tracking, most of these companies can’t easily access their data to do so. The result? A limited understanding of performance and decisions based on best guesses, rather than hard data.
If you’re looking for increased visibility – and the ability to simplify your processes to meet your KPIs – it might be time to explore a new ERP solution. Check out this resource to understand how ERP software can give you greater visibility and control of your inventory.