A good inventory management system can help you reduce costs and boost revenue. So, why aren’t more businesses embracing a good inventory management system?
Sometimes, it’s because they don’t know what benefit they need to see. They just know that inventory systems can help them save time and money.
If that sounds like your business, then you need to make sure you track the right inventory management KPIs.
Let’s get into it!
1. Inventory Turnover Ratio
This is one such important KPI used to measure the effectiveness of a company’s inventory management. It is an important metric that measures the number of times inventory has been sold within a given period.
It helps measure the efficiency of a company in converting its inventory into sales. Proper inventory management is essential for businesses.
A high inventory turnover ratio is a great indicator of effective inventory management. Companies should monitor their inventory turnover ratio. This is to ensure they are not stocking too much inventory, which can lead to additional costs.
2. Customer Satisfaction Levels
Customer satisfaction levels are one of the most important KPIs to measure when it comes to inventory management. Companies should be constantly looking to identify customer needs. This is to help meet their expectations, which directly affects satisfaction levels. A few key metrics to measure customer satisfaction levels include the following:
- Customer feedback
- Customer churn rate
- Customer complaint volumes
- Customer loyalty
- Overall customer experience
Companies should focus on providing a great customer experience by improving the visibility of products and services, ordering accuracy, product availability, delivery speed, and customer service.
3. Backorder Rate
This rate must be low as a high backorder rate indicates an inefficient inventory management system. Additionally, a high backorder rate is damaging to customer relationships. This is because customers are more likely to take their business elsewhere due to the unavailability of desired items.
This measures the number of items out of stock divided by the total number of orders. A high backorder rate indicates an inefficient inventory system. It suggests that not enough items have been stocked for customers.
To reduce the backorder rate, companies should review the following:
- Purchase orders
- Return Policies
- Inventory stores
There should also be a process in place to track backorders and analyze the reasons behind them.
4. Carrying Costs of Inventory
Factors like inventory size, the profitability of the production process, and the cost of storage and transport all contribute to the total cost. Inventory KPIs allow you to track how your supply chain is performing. This can be used to measure the effectiveness of your inventory planning.
Carrying costs of inventory are often overlooked. However, it can be broken up into three categories: ordering, carrying, and holding costs. Ordering costs consist of the costs associated with ordering the inventory. This is while carrying costs include costs of storing, handling, and insuring the inventory.
5. Order Cycle Time
OCT measures how long it takes from when an order is placed until it is received. Lower OCT indicates a better-managed inventory as orders are filled quicker and more accurately.
OCT includes the time from the placement of the order to when the order is received and accepted by the customer. Achieving an optimal OCT requires specialized knowledge and experience in managing inventory systems.
Companies must have the right number of items in their inventory, in the right locations, promptly. This requires detailed processes, rigorous order fulfillment, and management. These aim to ensure orders are received quickly and efficiently.
Achieving the optimal OCT is a key indicator of a company’s adeptness in managing its inventory management systems. This is while also reducing costs of inventory and shipping.
6. Rate of Return
It is the ratio of the net profit generated from inventory sales divided by the cost of the inventory sold. The expected rate of return will depend on the type of business operations and the customer base and will depend on demand, pricing, and inventory turnover.
A lower amount of returns will suggest that customers are satisfied with their purchase. In contrast, too many returns mean that customers are unsatisfied and may indicate a decline in product quality or a lack of customer service.
The rate of return also allows businesses to figure out any potential issues with their inventory system, like lack of efficient online ordering, product availability, and pricing.
Companies should work to manage their inventory efficiently to maximize profitability and reduce their rate of return. This includes proper stock control of the locations at which inventory is stored and scheduled deliveries to ensure stock demand is met promptly.
7. Order Pick, Pack, and Dispatch Accuracy
Measuring the accuracy of picking, packing, and dispatching orders is important for optimizing inventory levels. By tracking these aspects, companies can proactively identify and address issues like incomplete orders, wrong orders, and missed orders.
Furthermore, it allows companies to manage customer experience, improve customer service, and reduce storage and labor costs. By monitoring order pick pack and dispatch accuracy, companies can also determine if their procurement process needs to be updated to reduce order errors.
Additionally, this can help ensure stock availability, limit overstock, and minimize stockouts of key items. Overall, order pick pack and dispatch accuracy is essential for monitoring the efficiency of inventory management.
8. Service Level
Inventory management KPIs for service level are critical to the success of any company. These KPIs measure the performance of inventory management strategies and processes and help to ensure that service levels are met.
Service level measures the percentage of customer demand that is met quickly and accurately, with a higher number indicating better performance.
This KPI is important since failure to meet customer demand promptly can hurt customer satisfaction as well as the company’s bottom line. Check these extra resources on surplus inventory management to learn more about running a business.
Learning the Top Inventory Management KPIs that Are Worth Tracking
Inventory management KPIs are a great tool to help your company better manage its stock. Implementing KPIs allows you to measure performance and track progress, which can improve customer satisfaction.
Take the time to understand what the KPIs mean for your business and how to access them to make the most of this valuable tool. Try it today to stay ahead of the competition and get the most out of your inventory management!