Inventory management is a key factor in the success of any business that deals with physical goods. It affects your cash flow, customer satisfaction, operational efficiency, and competitive edge. But how do you know if you are doing it well compared to your rivals? In this article, we will explore some ways to measure your inventory performance and identify areas for improvement.
One of the most common metrics for inventory management is the inventory turnover ratio, which measures how often you sell and replace your inventory in a given period. A high ratio indicates that you are selling your products quickly and efficiently, while a low ratio suggests that you have excess or obsolete inventory that ties up your capital and storage space. To calculate your inventory turnover ratio, divide your cost of goods sold by your average inventory value. You can compare your ratio to industry benchmarks or your own historical data to see how you stack up.
Inventory should be an 75/25 split of basic best sellers and newness or fashion. You need the newness to test what is trending. Sometimes you can be on target trend wise but your demographic is not ready for it. You need the fashion to get the attention but the biggest sales are still going to be in the basics. With this mix you satisfy what your customer needs and also offer what she wants! Even in your small footprint stores it's important to offer fashion!
Another important aspect of inventory management is inventory accuracy, which refers to how closely your physical inventory matches your records. Inventory accuracy affects your ability to fulfill orders, plan production, avoid stockouts, and prevent theft or loss. To measure your inventory accuracy, you need to conduct regular physical counts and audits, and compare them to your inventory system data. You can use the inventory accuracy percentage formula, which is the number of accurate items divided by the total number of items, multiplied by 100. You can also track the frequency and causes of any discrepancies, and implement corrective actions.
Accurate inventory data is absolutely necessary to a have successful sales program. It's the basis for every decision the sales team will make. If they don't know what they've got, their hands are tied.
Inventory carrying cost is the total cost of holding and maintaining your inventory, including storage, insurance, taxes, depreciation, obsolescence, and opportunity cost. Inventory carrying cost reflects the trade-off between having enough inventory to meet demand and minimizing the expenses associated with it. To measure your inventory carrying cost, you need to add up all the relevant costs and divide them by your average inventory value. You can express the result as a percentage or a dollar amount. You can compare your inventory carrying cost to your revenue or profit margin to see how it affects your bottom line.
Fill rate is the percentage of customer orders that you can fulfill from your available inventory, without backorders or delays. Fill rate measures your customer service level and your inventory availability. A high fill rate indicates that you are meeting your customer expectations and avoiding lost sales, while a low fill rate suggests that you have inventory shortages or inefficiencies. To calculate your fill rate, divide the number of orders fulfilled by the number of orders placed, and multiply by 100. You can also calculate the fill rate for individual items, categories, or locations.
Inventory turnover days is the average number of days that your inventory stays in your warehouse before being sold. It is also known as days inventory outstanding or days sales of inventory. Inventory turnover days measures your inventory liquidity and efficiency. A low number of days indicates that you are moving your inventory fast and freeing up cash, while a high number of days suggests that you have slow-moving or stagnant inventory that reduces your profitability. To calculate your inventory turnover days, divide 365 by your inventory turnover ratio, or divide your average inventory value by your cost of goods sold per day.