The primary goal of any online brand is to provide the products a customer wants in as short a timeframe as possible. But it isn't always that simple, especially for multichannel brands managing physical inventory across a network of disparate sales channels and warehouses.
In a race to be everywhere at once, you can lose sight of valuable inventory and sales opportunities. Without firm Inventory KPIs and a strong warehouse or inventory management system, operations and profitability are always at risk.
Inventory accuracy plays a lead role in the health of your business, and the satisfaction of your customers. Having too much product in stock can cause just as many problems as not enough, so it is not just about keeping the shelves stocked, it is about keeping them stocked correctly. And that involves tracking key performance indicators or KPIs.
Why you should be tracking these inventory KPIs?
Understanding inventory metrics and inventory KPIs will give you a benchmark to measure the overall performance of your business. They will help point out areas where your business can improve the way it does things whether that is in maintaining cash flow, reducing holding costs, managing deadstock, or improving production efficiency. The goal is to provide what customers want, when they want it, supported by a fully branded positive customer experience.
The top 9 inventory KPIs you should be tracking in 2021
Here are nine key performance indicators you'll want to monitor in 2021 to ensure your business is running smoothly and customer experience is optimal.
Inventory Turnover Rate
Inventory turnover rate measures how many times a company's inventory is sold and restocked in a specific period. Generally, a higher turnover means you are running your business more efficiently. You have products people want because they are selling quickly and you are also keeping them in stock.
There are two ways to calculate inventory turnover rate: divide sales by the average inventory over a specific period, or divide the cost of goods sold by the average inventory for a specific period.
This is the average amount of inventory available during a given time period.
This can be calculated by adding the on-hand inventory in each period and dividing it by the count of the time periods. This figure when used with other KPIs can tell you important things about the health of your business. When used by itself, it can tell you how consistent inventory levels are over time which is critical to accurate forecasting.
Stock to Sales Ratio
The stock to sales ratio is a measure of the inventory versus the number of sales. With this calculation, a perfect score would be 1. In other words, your SKUs during a period matched your sales. There was just enough product in stock to satisfy customer needs. A lower ratio would mean stock-outs, and a higher one means you have excess inventory.
Order Cycle Time
This is also called order lead time. This metric measures the amount of time it takes for a customer to receive an order. For a better customer experience, you want this average time to be as short as possible. Longer lead times can indicate issues with your inventory management, supply chain, or fulfillment operations.
Inventory Carrying Cost
This number will tell you how much capital a business has invested in its inventory. This is the percentage of the total value of their entire inventory that a company spends to maintain and store that inventory.
It is calculated by adding all the costs of maintaining inventory including warehousing cost, rent cost, labor cost, and insurance cost, and dividing that by the total value of the inventory. Then multiplying by 100 to get a percentage.
Days to Sell Inventory
This KPI will tell you how many days it takes to turn your inventory into sales.
It is calculated by dividing your average inventory by cost of sales and then multiplying this by 365. The optimum value for this metric depends on the industry, but a lower number usually means more efficient inventory management.
Perfect Order Rate
This is the percentage of customer orders that had no issues. It is an important metric to watch if you are concerned about customer experience and retention. Factors used to determine a perfect order include on-time shipping, undamaged products, and complete orders. It is calculated by dividing the order without issues by the total orders and multiplying by 100.
Order Fill Rate
This number will tell you how many items that customers ordered are able to be shipped out. A fill rate close to 100% means that you are keeping customers happy by shipping most of their products when they order them. The formula for order fill rate is: ((# total order items – # shipped items) / # total order items) x 100.
Back Order Rate
This KPI will show you how well a business is keeping up with customer demand. If your back order rate is high, then some potential customers may be going elsewhere when you don't have a product in stock. It is calculated by dividing the number of orders delayed due to backorder by the total number of orders placed and multiplying by 100.
Lastly, we're talking returns. The average ecommerce return rate is around 20% but the true cost of an online return is much higher. The average Shopify brand loses 80% of its returns to refunds. Understanding your return rate is a great first step to turning those returns into new sales opportunities.
Guest post bio:
Gina Ellison manages Partner Marketing for Skubana, an operations platform designed to help multichannel sellers and D2C brands unify and automate their retail operations. When Gina is not marketing ecommerce software, she likes to spend time outdoors with her dog Elli.