If you ever wanted an in-depth look at a business, all you’d need to do is take a look at their inventory management metrics. These inventory metrics and other key performance indicators (KPIs) can tell you right away how a business defines itself, conveying the trends most important to the company. Inventory management software allows businesses to more effectively manage their KPIs and outline the most effective behaviors for a supply chain operation in a quick, easy-to-understand way.
Using Metrics and Inventory KPIs to Drive More Effective Behaviors and Outcomes
The purpose of using metrics and KPIs across inventory control systems is to drive the most effective behaviors, decisions and strategies possible. Metrics and KPIs that reinforce the silo-based behavior of many manufacturers (such as data and knowledge hoarding) are being replaced by those that reward collaboration. With valuable metrics and increased collaboration, businesses are able to improve on-time deliveries, increase customer satisfaction and reduce operating costs.
Selecting the best metrics needs to begin with careful considerations. Think about the following circumstances before you decide which inventory management KPIs are most important to your business:
- Inventory metrics change how everyone does their job related to the supply chain. Choose carefully.
- It’s easy to choose inventory KPIs that capture efficiency but far more difficult to choose those that reflect increases in effectiveness. Yet, the latter set is more valuable.
- Resist selecting metrics and KPIs for inventory management that are too broad in scope. When these are too broad, they won’t quickly deliver insights into the areas you need to take action on.
- Reduce and eliminate metrics that promote competition between departments. Instead, adopt ones that amplify and reward collaboration.
- Stock management metrics need to reflect your company’s strategic objectives and reinforce contributions to those goals.
- Beware of vanity metrics that make a specific department or process look good, yet don’t deliver any insights into improving the effectiveness of inventory management, supply chains or production.
- When selecting an inventory system, make sure the inventory KPI dashboard can be configured how you’d like. Metrics management can be just as important as selecting the right KPIs.
10 Most Important Inventory Management KPIs and Metrics that Improve Inventory Management Processes
The use of excellent key performance indicators (KPIs) helps translate operational performance into financial reporting across an entire inventory management system to improve production and purchasing processes, cash flow, and profitability. KPIs quickly translate the impact of many diverse business operations activities across inventory and supply chain locations into financial data.
Companies with excellent inventory control systems also rely on frameworks to transform their metrics and KPIs into a common strategic direction. The American Production Control and Inventory Management Society (APICS) SCOR Model and Gartner’s Hierarchy of Supply Chain Metrics are two of the most popular frameworks for evaluating inventory management performance as part of broader supply chain networks.
Both are excellent frameworks to rely on when defining metrics that measure supply chain effectiveness and its impact on profitability. The SCOR model was recently updated to include support for omnichannel, blockchain, sustainability and several other major improvements. The Gartner Hierarchy of Supply Chain Metrics is a widely-adopted framework globally and is briefly explained by Gartner. The latest edition of the APICS SCOR model is shown below:
Source: APICS SCOR Participant Workbook
Based on conversations with manufacturers over the last year, the following are the ten most effective inventory management system KPIs and metrics:
1. Demand Forecast Accuracy
An excellent metric for determining how strong collaboration is in a manufacturing operation, demand forecast accuracy reflects the variation in real or actual demand and what is forecasted at the factory level. Inventory metrics for manufacturing can make operations more effective by closing the gaps between forecasted demand and actual demand.
This metric also contributes directly to reducing inventory carrying costs, a key indicator of inventory management effectiveness. With demand forecasts on hand, you’re less likely to order inventory beyond market demand. Further, demand forecasts can also clue you in on when to order more stock than normal so you never miss a chance for growth.
2. Customer Satisfaction Levels
Often measured in net promoter scores (NPS), customer satisfaction levels need to be evaluated across all distribution and selling channels. Best-in-class manufacturers measure selling and distribution separately, determining an NPS score for each channel. This is to index your customers’ order-to-delivery times and check to see if they’re consistent with what was originally expected.
3. Perfect Order Performance
Perfect order performance quantifies how effective an organization is at delivering complete, accurate and damage-free orders to customers on time. The equation that defines the perfect order index (POI) or perfect order performance is: (percent of orders delivered on time) * (percent of orders complete) * (percent of orders damage free) * (percent of orders with accurate documentation) * 100.
The majority of manufacturers are attaining a perfect order performance level of 90 percent or higher, according to The American Productivity and Quality Center (APQC). The more configurable products are, the more difficult perfect order performance is to attain. However, the rapid growth of manufacturing intelligence is making perfect order performance more attainable than ever across the spectrum of production strategies.
4. Fill Rate Effectiveness as a Percentage of All Orders
Measuring supply chain collaboration needs to be a priority when selecting metrics and KPIs to manage your inventory operation. Tracking fill rate effectiveness as a percentage of all orders directly reflects how many orders or requests for material from production centers are fulfilled. Taking this metric a step further provides insights into how well production centers are managing inbound inventories to meet customer delivery dates.
5. Gross Contribution Margins by Product, Production Facility and Business Unit
Best-in-class inventory management solutions are designed to provide gross contribution margin (GCM) performance levels across several different dimensions of business. GCM is one of the most effective metrics a business can use to evaluate how well collaboration is happening across business units. If you know the GCM attributable to a given production center, you can then track performance and effectiveness levels by location.
6. Order Cycle Time
This metric is also referred to as order lead time, but order cycle time is the more popular iteration. Order cycle time measures the time from when a customer places an order to when they receive their purchased product. This metric reflects how effective your inventory management, supply chain, production and fulfillment operations are.
Order cycle time also sometimes refers to the time between the placement of two back-to-back orders or the successful delivery of two consecutive orders. Regardless of how your company defines these metrics, you should still measure them to get a comprehensive view of your order fulfillment process and where you could improve. For additional details on this metric and its various names, please see the article, What’s the Difference Between Cycle Time, TAKT Time, and Lead Time?
7. Order Pick, Pack and Ship Accuracy
This measures one of the most core functions within an inventory management system. Pick, pack and ship is the process of locating inventory as well as packing the ordered items for shipment to fulfill customer orders. Customers can be any other department, organization or third-party manufacturers that ordered the shipped products.
Tracking these inventory management metrics can reveal where your warehouse processes are especially strong and where they are weak. Track more specific pick, pack and ship KPIs such as labor costs per item and labor costs per hour in addition to others to gain a total understanding of your warehouse productivity.
8. Inventory Turnover
This metric measures how many times a manufacturer’s inventory is sold and replaced, or turned over, in a specific period. Inventory turnover measures the efficiency of your business overall, with a higher turnover generally meaning greater efficiency. However, while some items you carry may have slower turnovers than others, they may be worth the extra time they spend on the shelf if they are good money-makers for your business.
There are two approaches most often used for calculating inventory turnover. The first is by dividing Sales by Average Inventory for a specific period. The second is to divide the Cost of Goods Sold (COGS) by average inventory for a specific period. An article from AccountingTools provides additional details on this metric.
9. Carrying Cost of Inventory
An invaluable metric for measuring how much of a manufacturer’s working capital is tied up in inventory, this metric provides insights into the hard-to-find costs of handling items. These include put-away, costs of obsolescence and how effective warehouse management systems (WMS) are in reducing fulfillment costs.
As discussed in the sections above, comparing carrying cost and inventory turnover with your contribution margins is a great way to see which items are worth the extra time in your warehouse.
10. Supplier Quality Index
Measuring how well your suppliers are performing is key to perfecting your business strategies. If you’re not using specific data points to track your suppliers, you can never be sure how much room exists for improvement. Track how often you have to return materials due to mistakes or abnormalities. You could also look into how many orders are received on time.
Choose whichever metrics are most important to your business. They can be simple like the previous examples or may be complex so you adhere to governmental regulations. For instance, medical product manufacturers need to provide a level of visibility to comply with the U.S. Food and Drug Administration mandate, 21 CFR Part 11. This mandate regulates how electronic records should be presented to the FDA.
Inventory management software can vastly improve your business, but you need a clear idea of exactly what you’ll be tracking with it. While the KPIs listed above are important to keep an eye on, make sure you keep tabs on other KPIs that are still very important to your business. These KPIs can be tracked through a series of tools provided by inventory management suites.
To decide what your next system will require in an organized way, check out our inventory management software requirements template. It includes tools to document all the features and considerations you need to think about when selecting an inventory control system. Use it to make sure your next system has all the tools needed to track the KPIs that will lead your company to success.
Do you agree with our list of the most important inventory management KPIs? Let us know in the comments down below!