What are the most effective KPIs to track stockouts and overstocks in inventory management?

1 Stockout Rate

Stockout rate is the percentage of orders that cannot be fulfilled due to insufficient inventory. It indicates how often a business runs out of stock and fails to meet customer demand. A high stockout rate can result in lost sales, dissatisfied customers, and damaged reputation. To calculate stockout rate, divide the number of orders that were not completed by the total number of orders in a given period. For example, if a business received 100 orders in a month, but could only fulfill 90 of them, the stockout rate would be 10%. To reduce stockout rate, inventory managers need to forecast demand accurately, replenish inventory regularly, and prioritize high-demand items.

2 Overstock Rate

Overstock rate is the percentage of inventory that exceeds the optimal level of stock. It indicates how much excess inventory a business is holding and wasting resources on. A high overstock rate can result in increased storage costs, reduced cash flow, and obsolescence risks. To calculate overstock rate, divide the value of overstocked inventory by the total value of inventory in a given period. For example, if a business has $100,000 worth of inventory, but only $80,000 is needed to meet demand, the overstock rate would be 20%. To reduce overstock rate, inventory managers need to adjust supply orders according to demand fluctuations, implement inventory reduction strategies, and dispose of obsolete or damaged items.

3 Inventory Turnover Ratio

Inventory turnover ratio is the number of times a business sells and replaces its inventory in a given period. It indicates how efficiently a business is managing its inventory and generating sales. A high inventory turnover ratio means that a business is selling its inventory quickly and minimizing stockouts and overstocks. A low inventory turnover ratio means that a business is selling its inventory slowly and accumulating excess or outdated stock. To calculate inventory turnover ratio, divide the cost of goods sold by the average inventory value in a given period. For example, if a business sold $200,000 worth of goods and had an average inventory value of $50,000 in a year, the inventory turnover ratio would be 4. To increase inventory turnover ratio, inventory managers need to optimize pricing, promotion, and distribution strategies, as well as align inventory levels with customer preferences and market trends.

4 Fill Rate

Fill rate is the percentage of customer orders that are shipped or delivered in full and on time. It indicates how well a business is meeting customer expectations and fulfilling its service level agreements. A high fill rate means that a business is avoiding stockouts and delays and satisfying customer demand. A low fill rate means that a business is experiencing stockouts and backorders and disappointing customer demand. To calculate fill rate, divide the number of orders that were shipped or delivered in full and on time by the total number of orders in a given period. For example, if a business received 100 orders in a month, but only shipped or delivered 95 of them in full and on time, the fill rate would be 95%. To improve fill rate, inventory managers need to improve demand forecasting, inventory visibility, and order fulfillment processes.

5 Inventory Carrying Cost

Inventory carrying cost is the total cost of holding and maintaining inventory in a given period. It includes various expenses, such as storage, insurance, taxes, depreciation, obsolescence, and opportunity costs. It indicates how much inventory is costing a business and affecting its profitability. A high inventory carrying cost means that a business is spending too much on inventory and reducing its profit margin. A low inventory carrying cost means that a business is spending less on inventory and increasing its profit margin. To calculate inventory carrying cost, add up all the inventory-related expenses and divide them by the average inventory value in a given period. For example, if a business had an average inventory value of $50,000 and incurred $10,000 in inventory-related expenses in a year, the inventory carrying cost would be 20%. To lower inventory carrying cost, inventory managers need to reduce overstocks, optimize inventory turnover, and negotiate better terms with suppliers and customers.

6 Here’s what else to consider

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