Inventory control and its effective management are one of the important tools of lean manufacturing. Now a day to run a business very important to control inventory because it directly holds the cash flow cycle. There are certain key performance indicators of inventory management. To improve business performance organization, require to maintain a low inventory level and the below-attached KPIs helps a lot to measure inventory level in various parameter.
Inventory management KPIs can be categorized into four parts as per mention below.
1. Managerial Level
At the managerial level inventory KPIs will be monitored and measured in 6 categories. To improve the performance of KPIs in managerial categories more than one department require to focus. The role of an organization is to manage relative departments and improve performance.
Inventory turnover ratio (ITR)
inventory turnover ratio basically measures how fast or late you turn inventory. To calculate the inventory turnover ratio, consider the period of receiving raw materials at the premises to deliver material to the customer.
Inventory Turnover ratio = (COGS/cost of Avg. inventory)
Whereas COGS means the cost of goods sold including the cost of labor as well as the cost of operating expenses and the cost of average inventory means includes raw material, work in progress, and finished goods inventory.
For example, if you measure the inventory turnover ratio in terms on yearly basis and it comes to 2.45 it means you turn your business inventory 2.45 times in a year. The organization takes more benefits if focused to improve the inventory turnover ratio.
Demand forecast accuracy
This KPI measures the accuracy of demand inventory Vs actual inventory. Demand forecast accuracy KPI is helpful to measure consumable as well as material inventory. Measurement of this KPI in percentage mode.
Demand forecast accuracy = value of inventory purchased / value of inventory using
The measurement value of demand forecast accuracy in ratio. The ratio will deviate within 1. Focused to maintain demand forecast accuracy ratio less than or equal to 1.
Days on hand
This KPI measures the average days’ inventory available at your premises. Make systematic efforts to minimize days on hand KPI. Days on hand KPI calculates inventory days with respect to sales.
Days on hand = (value of average inventory for period/cost of goods sold) * 365
Weeks on hand
this KPI measures the average week’s inventory available at your premises. Make systematic efforts to minimize weeks on hand KPI. Focused to minimize weeks on hand KPI.
Weeks on hand = (Average inventory for period/cost of goods sold) * 52
Stock to sales ratio
stock to sales ratio indicates the inventory availability versus sales. If any organization has a value of the inventory of $500 and the value of sales is $200 so, the ratio is 2.5. Focused to minimize stock-to-sales ratio.
Stock to sales ratio = (value of inventory/value of sales)
Sell-through rate
sell-through rate indicates the ratio of units sold versus units received. This KPI measures product is not cost basis. Focused to maximize the sell-through rate ratio.
Sell-through rate = Unit sold / unit received
2. Operational Level
At the operational level inventory KPIs will be monitored and measured in 5 categories. Operation management persons are responsible for improving operational KPIs.
Fill rate effectiveness
This KPI measures the effectiveness of demand fulfillment of the production work center without delay as per internal customer guidelines. Sometimes fill rate effectiveness is measured individually workstation-wise for performance improvement.
Fill rate effectiveness = (Number of requests fulfilled / Total number of requests received) *100
To take major benefits for fill rate effectiveness focused to improve this KPI nearest to 100%. In short in your material storage area maintain the minimum material required to fulfill a customer’s order.
Customer order cycle time
Customer order cycle time is basically the difference between the order placed by the customer and the required product received by customers. Now, customer order cycle time is focused on many parameters like inventory, manufacturing, and dispatch activities.
Customer order cycle time = customer order receive day – customer order place day.
Ensure to minimize customer order cycle time for improving cash to cash cycle and revenue generation.
Dead Stock
Dead stock is a level of inventory that is not consumed or used by the organization certain period of time. Dead stock is one of the categories of inventory to block liquidity. The organization is to take the fast decisions to sell dead stock inventory to other vendors or convert it into scrap if it is not showing the possibility to use it in the future.
Deadstock = (Amount of unused stock for a period/amount of available stock for a period) * 100
Available inventory accuracy
It represents inventory records physically counted vs inventory shown in records. The organization is to maintain available inventory accuracy closer to 100 %.
Available inventory accuracy = (Counted items match with records / total counted items) * 100
Carrying cost of inventory
Inventory carrying cost measures the cost associated with managing or holding inventory. Many industries are not focusing to calculate carrying costs because thinking of top management as its impact on total cost is very low but in actual cases carrying cost is a very vital role play in inventory management.
Carrying cost = cost of capital to carry inventory + cost of damaged inventory + cost of obsolescence + cost of inventory handlings in storage area + cost of the inventory management system (warehouse management system) + cost of inventory services (insurance, security, etc.)
3. Receiving Level
In receiving level inventory KPIs will be monitored and measured in 2 categories. To improve inventory management KPIs at receiving level effect in logistics performance and warehouse performance improvement.
Time to receive
Time to receive KPIs measures the amount of time taken for incoming goods and other mandatory processes. It includes material unloading, goods inspection, stock validation, goods added into inventory records, and goods storage in designated places.
It measures on minutes, hours or day wise.
Put away time
put away time indicates the time required to store goods in the designated place. Generally, measured in minutes or hours.
4. Storage Level
In storage level inventory KPIs will be monitored and measured in 3 categories. Storage level KPIs indicate the accuracy of inventory management.
Backorder rate
The backorder rate is one of the KPIs of inventory management to monitor the number of customer order delays due to stock-out situations. The rate of backorder is also providing an overview of on-time material availability at premises as well as demand accuracy.
Backorder rate = (Number of order delays due to stock out / total number of orders placed by customer) * 100
Shrinkage cost
Shrinkage cost measures the percentage of defective material cost during goods storage. Most organizations generally purchase incoming raw material goods based on larger quantity discount models but they are not focusing to calculate shrinkage costs. Shrinkage cost varies from product to product.
Shrinkage cost = (cost of recorded inventory – the cost of physical inventory) / (cost of recorded inventory) *100
Lost sales ratio
lost sales ratio represents the no of stock out days compared to account days. Any organization focusing to minimize lost sales ratio and maintain a safety stock level at premises also verify demand accuracy.
Lost sales ratio = (Product stock out days / 365) * 100
