How do you compare your inventory optimization performance?

1 Inventory turnover ratio

One of the most widely used metrics for inventory optimization is the inventory turnover ratio, which measures how many times you sell and replace your inventory in a given period. A higher inventory turnover ratio indicates that you are selling your inventory faster and more efficiently, while a lower ratio suggests that you have excess or obsolete inventory that ties up your cash flow and storage space. To calculate your inventory turnover ratio, you can use this formula: Inventory turnover ratio = Cost of goods sold / Average inventory The cost of goods sold (COGS) is the total cost of producing and selling your products, while the average inventory is the average value of your inventory at the beginning and end of the period. You can compare your inventory turnover ratio with industry averages or your own historical data to see how you are performing relative to your peers or your goals.

2 Fill rate

Another important metric for inventory optimization is the fill rate, which measures how well you meet your customer demand with your available inventory. A higher fill rate indicates that you are satisfying more customer orders and delivering better service, while a lower fill rate suggests that you are losing sales and customer loyalty due to stockouts or backorders. To calculate your fill rate, you can use this formula: Fill rate = Number of orders fulfilled / Number of orders received The number of orders fulfilled is the number of orders that you can ship from your existing inventory, while the number of orders received is the total number of orders that you get from your customers. You can compare your fill rate with industry standards or your own service level targets to see how you are performing relative to your customer expectations.

3 Inventory carrying cost

A third metric for inventory optimization is the inventory carrying cost, which measures how much it costs you to hold and maintain your inventory. A lower inventory carrying cost indicates that you are minimizing your inventory-related expenses, such as storage, insurance, taxes, depreciation, and obsolescence, while a higher inventory carrying cost suggests that you are spending too much on your inventory and reducing your profitability. To calculate your inventory carrying cost, you can use this formula: Inventory carrying cost = Inventory carrying cost percentage * Average inventory value The inventory carrying cost percentage is the annual percentage of your average inventory value that represents your inventory-related expenses, which can vary depending on your industry and business model. The average inventory value is the same as in the inventory turnover ratio formula. You can compare your inventory carrying cost with industry benchmarks or your own budget to see how you are performing relative to your cost efficiency.

4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?