What are the most important performance indicators for an effective inventory control system?

The Inventory management is one of the key function which has many hidden losses if not maintained properly. The Most important KPI for effective inventory control systems are to Control of Dead Inventory (in terms of shelf life, wear and tear due to old stock, non movable parts etc), Inventory turnover ratio, Line stoppage due to non availability of material, inventory variance physical vs. on paper. Other than that effective inventory management help us to improve over all supply chain management.

Few KPI's which can monitor for a plant is below. Inventory Turnover Ratio, vendors delivery adherence, Supplier Performance, vendor line throw back, nos of time stockout , Inventory Accuracy and RMS value of inventory difference, lead and order cycle time, Inventory carrying cost, inventory aging in terms of 30/90/180 days as well dead stock value and liquidation trend of dead stock etc.

The frequency with which you sell or utilize your inventory during a specific time frame, often a year, is gauged by the inventory turnover ratio (ITR). The computation involves dividing the average inventory value by the cost of goods sold (COGS). A high ITR suggests that your products are in strong demand and that your cost of inventory holding is cheap. Conversely, a low ITR can be an indication of low sales, outdated or excess inventory, or inaccurate forecasting. The ideal ITR varies depending on your market, product type, and sector; nevertheless, you can measure it against your rivals

The degree to which your physical inventory matches the information in your inventory management system is known as inventory accuracy. To determine the percentage, divide the total number of objects counted by the number of accurately counted items, then multiply the result by 100. When your inventory accuracy is good, you can plan your manufacturing, purchasing, and sales activities with confidence. Conversely, a low inventory accuracy could result in waste, overstocking, stockouts, or disgruntled customers. By utilizing barcodes or RFID tags, doing routine cycle counts, and putting quality control systems in place, you may increase the accuracy of your inventory.

The frequency with which you run out of inventory to complete orders from customers or meet production demands is measured by the stockout rate. To determine the percentage, divide the total number of orders or requests by the number of stockouts, then multiply the result by 100. A low rate of stockouts indicates excellent client satisfaction and service quality. Conversely, a high stockout rate could lead to a decline in sales, a hold-up in deliveries, or a tarnished reputation. By enhancing your inventory visibility, replenishment procedures, and demand forecasting, you can lower your stockout rate.

It is to get better understanding for each item in the inventory , to have data for the number of orders received at particular point and compare with the inventory item stock , special stockout rate for the items receiving orders but they are out of stock

The amount you pay to hold and manage your inventory is called the inventory carrying cost. It covers the price of taxes, insurance, depreciation, obsolescence, and warehousing. It is computed by calculating the annual carrying cost percentage—which varies based on your industry and business model—by the average inventory value. A lean and effective inventory control system is indicated by a low inventory carrying cost. Conversely, a large inventory carrying cost could hurt your cash flow and profit margins. By optimizing your inventory handling, layout, and levels, you can reduce the carrying cost of your stock.

A good product design and packaging that would consider handling at every stage of product distribution (warehousing, merchandising etc.) would ensure a reduction in inventory shrinkage. Proper training of staffs at various product handling stages would also help to reduce inventory shrinkage.