What is the most effective way to measure inventory management performance?

1 Inventory Turnover Ratio

One of the most common and important metrics to measure inventory management performance is the inventory turnover ratio, which indicates how often you sell and replace your inventory in a given period. A high inventory turnover ratio means that you are selling your products quickly and minimizing the costs of holding and storing inventory. A low inventory turnover ratio, on the other hand, means that you have excess or obsolete inventory that is tying up your cash flow and taking up valuable space. To calculate your inventory turnover ratio, you need to divide your cost of goods sold (COGS) by your average inventory value.

2 Inventory Accuracy

Another key metric to measure inventory management performance is inventory accuracy, which reflects how well your physical inventory matches your records in your inventory management system. Inventory accuracy is essential for avoiding stockouts, overstocking, and misplacement of products, as well as for ensuring accurate forecasting, ordering, and replenishment. To calculate your inventory accuracy, you need to divide the number of items that match your records by the total number of items counted in your physical inventory.

3 Fill Rate

Fill rate is a metric that measures how well you fulfill your customer orders from your available inventory. It shows the percentage of orders that you can ship without any backorders or delays. A high fill rate means that you have a high level of customer satisfaction and loyalty, as well as a low risk of losing sales to competitors. A low fill rate, on the other hand, means that you have a high level of customer dissatisfaction and complaints, as well as a high risk of losing market share and reputation. To calculate your fill rate, you need to divide the number of items shipped by the number of items ordered.

4 Inventory Carrying Cost

Inventory carrying cost is a metric that measures how much it costs you to hold and maintain your inventory over time. It includes the costs of storage, insurance, taxes, depreciation, obsolescence, and opportunity cost. Inventory carrying cost is a significant expense for any business, and it can erode your profit margins and cash flow. Therefore, you want to minimize your inventory carrying cost by optimizing your inventory levels, reducing your inventory waste, and increasing your inventory turnover. To calculate your inventory carrying cost, you need to add up all the costs associated with holding your inventory and divide it by your average inventory value.

5 Inventory Shrinkage

Inventory shrinkage is a metric that measures how much inventory you lose due to theft, damage, spoilage, or errors. Inventory shrinkage can have a negative impact on your inventory accuracy, fill rate, and profitability. Therefore, you want to reduce your inventory shrinkage by implementing effective security, quality control, and auditing measures. To calculate your inventory shrinkage, you need to subtract your physical inventory value from your recorded inventory value and divide it by your recorded inventory value.

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?