11 KPIs That Can Help Improve Your Inventory Management Process

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.