How do you pick the right KPIs for inventory management?

1 Align KPIs with your strategy

The first step to picking the right KPIs for inventory management is to align them with your overall business strategy and vision. Your KPIs should reflect what matters most to your business and your customers, and how you can create value and competitive advantage. For example, if your strategy is to offer fast and reliable delivery, you might want to use KPIs such as order fulfillment rate, order cycle time, and on-time delivery rate. If your strategy is to reduce inventory costs and improve cash flow, you might want to use KPIs such as inventory turnover ratio, days sales of inventory, and inventory carrying cost.

2 Choose relevant and specific KPIs

The second step to picking the right KPIs for inventory management is to choose relevant and specific KPIs that are meaningful and actionable. You should avoid using vague or generic KPIs that do not reflect your inventory situation or challenges, or that are not linked to your inventory processes and decisions. For example, instead of using a broad KPI such as inventory accuracy, you might want to use more specific KPIs such as cycle count accuracy, stockout rate, or shrinkage rate. You should also make sure that your KPIs are relevant to your industry, market, and customer segments, and that they can be easily measured and tracked.

3 Use a balanced mix of KPIs

The third step to picking the right KPIs for inventory management is to use a balanced mix of KPIs that cover different aspects and dimensions of inventory performance. You should not rely on a single or a few KPIs that might give you a distorted or incomplete picture of your inventory situation. Instead, you should use a combination of KPIs that reflect the quality, quantity, timeliness, and cost of your inventory, as well as the customer satisfaction and loyalty. For example, you might want to use a mix of KPIs such as inventory turnover ratio, fill rate, inventory to sales ratio, and customer retention rate.

4 Set realistic and achievable targets

The fourth step to picking the right KPIs for inventory management is to set realistic and achievable targets for each KPI that you use. Your targets should be based on your current inventory performance, your industry benchmarks, and your improvement potential. You should avoid setting targets that are too high or too low, as they might demotivate or mislead your inventory team. You should also review and adjust your targets periodically, based on your changing inventory conditions and goals. For example, you might want to set targets such as increasing your inventory turnover ratio by 10%, reducing your stockout rate by 5%, or maintaining your fill rate above 95%.

5 Monitor and communicate KPIs regularly

The fifth step to picking the right KPIs for inventory management is to monitor and communicate your KPIs regularly to your inventory team and other stakeholders. You should use a dashboard or a report that displays your KPIs in a clear and visual way, and that shows your progress and performance against your targets. You should also share your KPIs with your suppliers, customers, and managers, and solicit their feedback and suggestions. By monitoring and communicating your KPIs regularly, you can identify and address any inventory issues or gaps, celebrate and reward any inventory achievements or successes, and foster a culture of continuous improvement and learning.

6 Review and update KPIs as needed

The sixth step to picking the right KPIs for inventory management is to review and update your KPIs as needed, based on your changing inventory needs and goals. You should not stick to the same KPIs forever, as they might become outdated or irrelevant over time. Instead, you should evaluate and revise your KPIs periodically, based on your inventory performance, feedback, and best practices. You should also experiment and test new KPIs that might offer you new insights or opportunities for inventory optimization. By reviewing and updating your KPIs as needed, you can ensure that they remain valid and valuable for your inventory management.

7 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?