How do you measure inventory optimization success?

1 Inventory Turnover Ratio

Inventory turnover ratio (ITR) is the number of times your inventory is sold and replaced in a given period, usually a year. It indicates how well you are managing your inventory levels and generating sales. A high ITR means you are selling your inventory quickly and minimizing your holding costs. A low ITR means you are holding too much inventory and risking obsolescence, spoilage, or excess capital. To calculate your ITR, divide your cost of goods sold (COGS) by your average inventory value.

2 Fill Rate

Fill rate is the percentage of customer orders that are fulfilled from your available inventory without any backorders or stock-outs. It measures how well you are meeting your customer demand and satisfaction. A high fill rate means you are delivering your products on time and avoiding lost sales or customer complaints. A low fill rate means you are missing out on sales opportunities and damaging your reputation. To calculate your fill rate, divide the number of units shipped by the number of units ordered.

3 Inventory Accuracy

Inventory accuracy is the degree of alignment between your physical inventory and your inventory records. It reflects how well you are tracking and controlling your inventory movements and transactions. A high inventory accuracy means you have a reliable and updated view of your inventory status and availability. A low inventory accuracy means you have discrepancies and errors in your inventory data and reports. To calculate your inventory accuracy, divide the number of correct inventory counts by the total number of inventory counts.

4 Inventory Carrying Cost

Inventory carrying cost is the total cost of holding and maintaining your inventory over a period of time. It includes the costs of storage, insurance, taxes, depreciation, obsolescence, shrinkage, and opportunity cost. It represents the trade-off between holding more inventory to meet demand and holding less inventory to save costs. A low inventory carrying cost means you are optimizing your inventory investment and cash flow. A high inventory carrying cost means you are tying up too much capital and resources in your inventory. To calculate your inventory carrying cost, divide your total inventory carrying cost by your average inventory value.

5 Inventory Optimization Index

Inventory optimization index (IOI) is a composite metric that combines the four metrics above into a single score. It measures how well you are balancing the conflicting objectives of inventory optimization: maximizing sales, minimizing costs, and ensuring accuracy. A high IOI means you are achieving inventory optimization success. A low IOI means you have room for improvement in one or more of the metrics. To calculate your IOI, multiply your ITR, fill rate, inventory accuracy, and (1-inventory carrying cost) and take the square root.

6 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?