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11 KPIs That Can Help Improve Your Inventory Management Process

Article - 5 Min. Read

Inventory plays a key role in the health of your business. Discover 11 popular KPIs that can help you streamline processes and improve profitability.

Illustration of shipments navigating a finely tuned warehouse process.

Inventory can play a substantial role in the health of a business—having too much could cause problems, as could having too little. Possible troubles include increased costs, missed sales and frustrated customers who can’t get their orders filled. By using key performance indicators (KPIs) to track and manage inventory, businesses can improve purchasing and production processes, cash flow and profitability. Moreover, KPIs enable companies of all sizes to measure the impact of business operations.

When it comes to inventory management, there are several metrics worth considering. Since every company is different, the key is to determine which make the most sense for you. Here are 11 popular inventory management KPIs to consider:

1. Inventory Turnover or Days on Hand

This KPI examines how many times inventory has been sold and replaced in a given time period. The higher the inventory turnover rate, the better. High turnover speaks to good sales and a solid demand for a company’s product. If the turnover is low, the company has either too much stock or too few sales.

Conversely, your inventory days on hand (DOH) will show how long items are sitting around, and ideally that figure should be low. To calculate DOH: Average Inventory ÷ (Cost of Goods Sold ÷ # days in your accounting period).[1]

2. Days Sales of Inventory (DSI)

This KPI is a measure of how long it takes your company to turn its inventory into sales. The KPI varies from industry to industry depending on what you’re selling. Typically, large ticket items move slower than small ticket items or perishables, so make sure to take that into consideration if using this KPI.

3. Average Inventory

This KPI is used to estimate the amount of inventory your company has on hand during a particular time frame. The goal here is to avoid spikes or unanticipated drops in inventory, and to keep a relatively constant flow of inventory in and out, based on the needs of the business. To calculate average inventory for a specific period, the formula looks like this: (Beginning Inventory + Ending Inventory) ÷ 2.[2]

4. Holding Costs

Also known as inventory carrying costs, this KPI measures the costs related to storing unsold inventory. Viewed as a percentage of your total inventory value, holding costs include storage, labor and insurance expenses, as well as the cost of damaged and spoiled goods. Excess holding costs can have a significant impact on profitability. To help keep these expenses down, designate a reorder point and work to keep stock moving.[3]

5. Stock-outs

This KPI represents the number of times demand cannot be met due to the absence of required inventory—which can result in lost sales, missed opportunities and frustrated or lost customers. It provides a big picture view of how effective a business is at purchasing and production. While delays in the supply chain have certainly impacted stock-outs, taking steps to refine processes can help prevent them.[4]

6. Service Level

This KPI shows the percentage of customers who do not experience a stock-out during an inventory replenishment cycle. Service level denotes a compromise between the cost of excess inventory and the cost of a stock-out. Use this formula to calculate service level: (# orders delivered ÷ # orders received) x 100.[5]

7. Lead Time

An important element of supply chain management and the inventory control process, lead time measures the time it takes for a customer to receive a product after they order it. To calculate lead time, take the sum of the order process time and production time, and add that to the time it takes a supplier to deliver.[6]

8. Rate of Return

Measuring the rate at which items are returned is a key metric, but equally important is tracking the reason for the returns. This will help you identify trends and directly address any problems so that you can ensure a good customer experience and prevent future costly returns.[7]

9. Inventory Accuracy

If what’s on your shelves doesn’t match what’s in your books—or, more likely, databases—you’ll experience poor order accuracy rates and higher costs. Inventory accuracy helps prevent this scenario by requiring a physical inventory head count to verify that your electronic files are accurate.[8]

10. Perfect Order Rate

This KPI is the percentage of orders that a company ships without any inaccuracies or other issues such as damage or delays, with 100% being the target. A high perfect order rate can lead to excellent customer satisfaction.[9]

11. Net Promoter Score

A leading metric in customer experience, Net Promoter Score (NPS) represents how a business is perceived by its customers.[10] Problems fulfilling orders are going to derail customer satisfaction, and this KPI will call attention to issues you need to address. Similarly, a seamless experience can help earn you a great score.

Key Takeaway

The list of 11 KPIs above may seem daunting, but remember to choose the ones that make the most sense for your business and know that you don’t need to implement all 11 at once. If you’re new to this, consider starting with tracking inventory turnover, a relatively simple calculation that will allow you to measure how well your inventory is performing against your cost of sales.

By choosing the KPIs that fit your business’s needs and tracking them over time, you may begin to recognize patterns that will help you figure out how to improve your inventory management processes, and ultimately transform your business into a highly efficient organization.

  1. [1]Alix Fraser, “Inventory Days on Hand: Mastering Retail Inventory,” Lightspeed, Dec. 8, 2020.
  2. [2]Ibid.
  3. [3]Ian McCue, “Inventory Carrying Costs: What It Is & How to Calculate It,” Oracle, Nov. 6, 2020.
  4. [4]Hadleigh Reid, “What Are Stock Outs and How to Prevent Them,” DCL, April 21, 2021.
  5. [5]David Luther, “33 Inventory Management KPIs and Metrics for 2020,” Oracle, Sept. 18, 2020.
  6. [6]Ibid.
  7. [7]“Ecommerce return KPIs you need to know,” Return Rabbit, Oct. 20, 2021.
  8. [8]David Luther, “33 Inventory Management KPIs and Metrics for 2020,” Oracle, Sept. 18, 2020.
  9. [9]Ibid.
  10. [10]“What is NPS? Your Ultimate Guide to Net Promoter Score,” Qualtrics, Jan. 14, 2022.

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