Inventory management was once an opaque process. Companies with vast, complex supply chains didn’t have the data to know exactly, or even very accurately, how inventory moved through their ecosystem. But that’s not the case anymore.
Thanks to a constellation of internet-connected and data-driven technologies, companies can now track their inventory with precision. Visibility isn’t a problem. But this has created a new obstacle. Companies with tons of inventory data (and more appearing constantly) can’t make sense of them all in ways that improve inventory management. Before, they lacked insights. Now, they’re overwhelmed by them.
Ultimately, having too many data is a good problem to have. Every data point has value, especially for understanding the complexities of inventory. But using an abundance of data effectively isn’t about digesting them all at once. Quite the opposite; it’s about focusing on the metrics that matter most while tracking their changes closely.
What Is the First Step of Inventory Management?
Which metrics matter? We suggest focusing on these 10 inventory management KPIs:
1. Perfect-Order Frequency
How often does your company deliver a perfect order free of missing, broken, or otherwise defective inventory? As inventory management becomes more difficult—larger scale, faster speed, higher expectations, more complexity—perfect fulfillment gets harder, and failure has bigger consequences. Tracking the percentage of orders that arrive without problems reveals something fundamental about whether inventory management is working.
2. Demand-Forecast Accuracy
Every producer forecasts demand, then builds quotas around those projected figures. Tracking the accuracy of those forecasts is the first step toward aligning actual production and expected demand. Better forecast accuracy leads to lower carrying costs, which is another good indicator of inventory management performance.
While there is no standard acceptable forecast accuracy percentage due to the huge number of variables involved including the demand pattern of the items being forecasted, the ways of measuring forecast errors, and the consistency of measurement, it is clear that planning at a more granular level, or driver-based planning, that comes from capturing data from the front lines and aggregating it leads to more accurate forecasting.
3. Fill-Rate Effectiveness
Similar to the perfect order frequency, this metric tracks how often requests for products or materials from specific production locations get fulfilled as required. The fill rate effectiveness helps you understand how well your supply chain partners are performing. If there are weak links in the chain, it’s apparent in this metric.
4. Gross Contribution Margin by Segment
Another way to track the performance of individual production locations is to examine how much each one contributes to gross revenues. You can take this analysis a step further by monitoring the gross contribution for specific products or business units, thereby understanding where and how inventory brings revenue into the organization.
5. Order-Cycle Duration
The amount of time it takes between when a customer places an order and when they receive it reveals how well the constituent parts of inventory management work together. Like many metrics on this list, the figure at any given time matters less than knowing whether the cycle time is slowing down or speeding up and to what degree.
Some aspects of inventory management also relate to broader business performance. Turnover, or the number of times the entire turnover gets sold and replaced within a specified period, speaks to your company’s overall effectiveness.
7. Sell-Through Rate
Another way to track turnover is with the sell-through rate, or the comparison between how much inventory a company sells versus how much it receives over the same period. When inventory management works correctly, the amount sold versus received will be close in size.
8. Supplier-Quality Index
Supplier quality can make or break a supply chain. Find a consistent way to gauge supplier performance—rate of on-time delivery, consistency of perfect order, etc.—and use that to distinguish good suppliers from bad. The index is usually based on the percentage of materials received meeting specified quality requirements.
9. Dead Stock
How much of the inventory never gets sold because it breaks, spoils, or otherwise misses a window after which it can’t convert into revenue? Companies that excel at inventory management have processes so finely tuned that preventable mistakes don’t result in dead stock.
10. Net-Promoter Score
This metric measures how likely a customer is to recommend a company’s products. It’s a reliable indicator of customer satisfaction levels. If the net promoter score begins to rise or fall, it suggests that customer sentiment is changing around how your company distributes or sells products. The net promoter score provides a telling (if incomplete) look at the overall effectiveness of inventory management.
Automate KPI Tracking
Tracking inventory KPIs, even just 10 of them, is still a time-consuming undertaking. You will need to collect, contextualize, and analyze massive amounts of data continuously to prevent metrics from growing old and irrelevant. Realistically, doing it manually isn’t an option for most finance teams.
That’s why forward-thinking organizations rely on technology to do the work at a faster pace and on a larger scale than humans ever could. With tools from insightsoftware, the metrics outlined above track themselves. Explore how this works hands-on. Download a free inventory management dashboard that brings key metrics to life before your eyes.