Essential Inventory Management KPIs Every Business Should Track

Stock control plays a vital role in the solutions of many enterprises as it allows them to sustain ideal levels of stocks, avoid increasing costs, and improve customers’ satisfaction. Selecting the correct number of Key Performance Indicators (KPIs) helps to control processes, predict the materials needed, and not allow the temporary shortage of raw materials, or, conversely, the accumulation of inventories. In this article, an elaboration of the number one inventory management KPIs that every organization should monitor to have efficient operations and high profits is provided.

1. Inventory Turnover Ratio

The inventory turnover ratio reflects the number of times the average inventory of a given business has sold and is restocked within a specific duration. A higher turnover ratio is the indicator of efficient stock control, which reflects the high rate of the sales of products. A figure that is less than 1 suggests overstocking or slow-moving items which frustrates capital and inhibits store space leading to excess charges.

Why it Matters:

• Assists in determining the efficiency through which products are sold.

• Synchronization of stock supply to reduce cases where tenders get stocked up or conversely stocked.

• Identified items that may cause problems in the future such as expired stock.

2. Days Sales of Inventory (DSI)

DSI indicates the number of days required to sell an average day's Sales of Inventory. This achievement indicates that businesses with a lower DSI are more effective as they transform inventory into sales more effectively. A higher DSI may be due to slow sale of products or problems associated with the sales and marketing department.

Why it Matters:

• This helps to keep the cash coming in, by reducing the amount of stock that sits on the shelves for far too long.

• This use assists in determining products that take a long to sell and might require offers/promotions.

• He/she can support better forecasting and production planning.

3. Stockout Rate

This KPI is an indicator of the number of times a specific product is unavailable at a point in time that a client may require it. Stockouts can lead to lost sales, customer dissatisfaction, and a knock on the company’s image. Reducing stock outs keeps businesses in a position that helps them satisfy customers’ needs accordingly.

Why it Matters:

• Helps prevent switching costs which is the cost of clients moving to other firms within the same industry.

• Assists in making the right reorder point for inventory to be present when needed.

• Sustains both the customer interaction experience and confidence in the company.

4. Carrying Cost of Inventory

Cost of carrying means the cost that a business incurs in storing the unsold inventory including costs of warehousing, insurance, and other costs of physical deterioration. Higher carrying costs suggest that inventory and stocks affect profitability and, therefore, require the control of inventories.

Why it Matters:

• Compressed storage and insurance costs due to the elimination of any pertinent that is not needed.

• Promotes effective stock management and faster turnover of stock.

• Increases product profitability because it maintains a good stock of products according to market requirements.

5. Order Accuracy Rate

This metric determines the percentage of orders met fully, without the customer receiving the wrong item or quantity thereof. The correct order information improves customer satisfaction, as well as reduces expenses linked to returns or replacements.

Why it Matters:

• Helps the business gain the confidence of customers and retention of such customers.

• Overall it minimizes returns or re-shipment costs.

• Assists in finding places where the order is lasting longer in the process rather than moving faster.

6. Fill Rate

The fill rate measures the extent to which customer needs are satisfied without stock-out or backorders. This measures the proportion of orders that can be directly picked from stock to avoid cases where a business firm runs out of stock.

Why it Matters:

• This increases sales because it prevents lost sales due to late delivery of stocks to meet the customer's demands.

• Identifies sectors that require restocking attention to be paid.

• Helps to increase customer loyalty resulting from the proper fulfillment of orders.

7. Lead Time

Lead time is defined as the time that elapses between the placement of an order with a supplier and the arrival of that inventory. Companies are required to manage lead time with the aim of avoiding stock out and efficient stock restocking.

Why it Matters:

• Helps in demand forecasting and material management in terms of ideal stock evaluation.

• Reduces the period that is taken by delays in stocking the items.

• Better planning of the supplier vertices enhances relations between the organization and the supplier.

8. Gross Margin Return on Investment (GMROI)

GMROI aims to assess the profitability of inventory with the approach of evaluating a given dollar given out in stock. It assists firms in identifying whether their inventory investments are providing good returns. 

Why it Matters:

• Determines products that are most profitable, and necessary in the achievement of organizational goals.

• May assist in the proper management of inventory budgets as well.

• Gives an understanding of the marginal income-earning capability of inventory management decisions.

9. Backorder Rate

One of them is the backorder rate which reveals the extent to which the firms are failing to meet orders due to stock out. High backorder rates can be annoying for clients and may indicate an organization’s problems in inventory management or suppliers’ management as well.

Why it Matters:

• Cuts the levels of angry customers resulting from delays.

• Facilitates decisions on efficient management of inventory restocking.

• Outlines where on the supply chain there are deficiencies that require adjustments.

10. Shrinkage Rate

Shrinkage means losses that occur to the stock through theft, damage, or other miscues in the handling of merchandise in the store. Measuring shrinkage is being used to reduce losses and better understand what areas might need changes in processes or better security measures.

Why it Matters:

• Reduces cases of lost revenues as a result of products being lost, damaged, or stolen.

• Guarantees the correctness of the stock records and the company’s accounts.

• Discovers areas of operation that need fixing.

Conclusion

At Drpro, Managing inventory on the other hand necessitates constant checks on fundamental ratios to ensure that demand meets supply and the other way around. Businesses use inventory turnover, DSI, stockout rate, and carrying costs metrics to monitor and enhance their inventory operations and efficiencies, cut costs, and enhance customer satisfaction.

New-age inventory management software updates all the KPIs automatically and ensures that businesses get timely reports to make informed decisions. It is these KPIs that are important for planning demand, managing inventory, and constructing a robust supply chain. Organizations that maintain constant checks on these metrics can improve their productivity, increase their revenues, and sustain their performance in the long run.