How do you compare your inventory performance with industry standards?

1 Inventory Turnover Ratio

One of the most widely used metrics to assess inventory performance is the inventory turnover ratio. This ratio shows how many times you sell and replace your inventory in a given period, usually a year. A high inventory turnover ratio means that you have a fast-moving inventory and a low holding cost. A low inventory turnover ratio means that you have a slow-moving inventory and a high holding cost. To calculate your inventory turnover ratio, you need to divide your cost of goods sold (COGS) by your average inventory value. For example, if your COGS is $500,000 and your average inventory value is $100,000, your inventory turnover ratio is 5. To compare your inventory turnover ratio with industry standards, you can use online databases or reports that provide average ratios for different sectors and categories. For example, according to the 2020 Warehouse and Distribution Center Benchmark Report by WERC, the median inventory turnover ratio for all industries was 8.7.

2 Inventory Accuracy Rate

Another important metric to measure inventory performance is the inventory accuracy rate. This rate shows how closely your physical inventory matches your records in your inventory management system. A high inventory accuracy rate means that you have a reliable and consistent inventory data that supports your planning and decision making. A low inventory accuracy rate means that you have a poor and inaccurate inventory data that leads to errors and inefficiencies. To calculate your inventory accuracy rate, you need to divide the number of correct inventory counts by the total number of inventory counts. For example, if you count 100 items and 95 of them match your records, your inventory accuracy rate is 95%. To compare your inventory accuracy rate with industry standards, you can use online surveys or benchmarks that provide average rates for different industries and segments. For example, according to the 2020 Warehouse and Distribution Center Benchmark Report by WERC, the median inventory accuracy rate for all industries was 98%.

3 Inventory Carrying Cost

A third metric to evaluate inventory performance is the inventory carrying cost. This cost represents the total expense of holding and storing your inventory, including warehousing, handling, insurance, taxes, depreciation, and obsolescence. A high inventory carrying cost means that you have a large amount of inventory that consumes your resources and capital. A low inventory carrying cost means that you have a lean inventory that optimizes your cash flow and profitability. 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. For example, if your total inventory carrying cost is $50,000 and your average inventory value is $100,000, your inventory carrying cost is 50%. To compare your inventory carrying cost with industry standards, you can use online calculators or tools that provide average costs for different industries and products. For example, according to the Inventory Carrying Cost Calculator by The Balance, the average inventory carrying cost for the retail industry is 25%.

4 Inventory Performance Dashboard

A final tool to compare your inventory performance with industry standards is the inventory performance dashboard. This tool is a visual representation of your inventory metrics and trends that allows you to monitor and analyze your inventory performance in real time. A good inventory performance dashboard should include key performance indicators (KPIs) that are relevant to your business goals and industry benchmarks. For example, some common KPIs for inventory performance are fill rate, cycle time, order accuracy, and stockout rate. To create your inventory performance dashboard, you need to use a software or platform that can integrate your inventory data and display it in a user-friendly and interactive way. For example, some popular software or platforms for inventory performance dashboards are Microsoft Power BI, Tableau, and Zoho Analytics.

5 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?