5 Key Inventory KPIs Every Business Should Track
Managing inventory effectively is crucial for any business. Whether you’re running a small shop or a large corporation, keeping a close eye on your inventory can significantly impact your bottom line. Key Performance Indicators (KPIs) are essential tools for tracking inventory performance. In this blog, we’ll delve into the five key inventory KPIs every business should monitor to optimize inventory management and boost efficiency.
1. Inventory Turnover Ratio
What It Is: The Inventory Turnover Ratio measures how often inventory is sold and replaced over a specific period.
Why It Matters: A high turnover ratio indicates that your inventory is selling quickly, which is a good sign of strong demand and effective inventory management. Conversely, a low turnover ratio might suggest overstocking or weak sales.
How to Calculate:
Inventory Turnover Ratio
=
Cost of Goods Sold (COGS)
Average Inventory
Inventory Turnover Ratio= Average Inventory
Cost of Goods Sold (COGS)
​
Example: If your COGS is $500,000 and your average inventory is $100,000, your inventory turnover ratio would be 5. This means you sell and replace your inventory five times a year.
2. Days Sales of Inventory (DSI)
What It Is: Days Sales of Inventory indicates the average number of days it takes to sell your entire inventory during a specific period.
Why It Matters: DSI helps you understand how long your inventory sits before it’s sold. Lower DSI means quicker turnover, which can improve cash flow and reduce holding costs.
How to Calculate:
DSI
=
365
Inventory Turnover Ratio
DSI= Inventory Turnover Ratio
365
​
Example: If your inventory turnover ratio is 5, your DSI would be 73 days. This means it takes, on average, 73 days to sell through your inventory.
3. Gross Margin Return on Investment (GMROI)
What It Is: GMROI measures the profitability of your inventory. It shows how much gross profit you make for every dollar invested in inventory.
Why It Matters: A higher GMROI indicates better profitability and efficient use of inventory. It helps businesses assess the return on their inventory investment.
How to Calculate:
GMROI
=
Gross Profit
Average Inventory Cost
GMROI= Average Inventory Cost
Gross Profit
​
Example: If your gross profit is $200,000 and your average inventory cost is $100,000, your GMROI is 2.0. This means you make $2 in gross profit for every dollar invested in inventory.
4. Stockout Rate
What It Is: The Stockout Rate measures the frequency at which items are out of stock.
Why It Matters: High stockout rates can lead to missed sales opportunities and customer dissatisfaction. Monitoring this KPI helps you balance inventory levels and improve customer satisfaction.
How to Calculate:
Stockout Rate
=
Number of Stockouts
Total Number of Sales Opportunities
×
100
Stockout Rate= Total Number of Sales Opportunities
Number of Stockouts
​
×100
Example: If you experience 10 stockouts over 200 sales opportunities, your stockout rate is 5%. This means 5% of the time, customers could not purchase the items they wanted due to stockouts.
5. Carrying Cost of Inventory
What It Is: Carrying Cost refers to the total cost associated with holding inventory, including storage, insurance, and obsolescence.
Why It Matters: Understanding carrying costs helps you minimize unnecessary expenses and optimize inventory levels. High carrying costs can erode profits, so keeping these costs in check is crucial.
How to Calculate:
Carrying Cost
=
Total Carrying Costs
Average Inventory Value
×
100
Carrying Cost= Average Inventory Value
Total Carrying Costs
​
×100
Example: If your total carrying costs are $50,000 and your average inventory value is $200,000, your carrying cost is 25%. This means you spend 25% of your average inventory value on holding costs.
Tracking these five key inventory KPIs—Inventory Turnover Ratio, Days Sales of Inventory, Gross Margin Return on Investment, Stockout Rate, and Carrying Cost of Inventory—provides valuable insights into your inventory management. By regularly monitoring these KPIs, you can make informed decisions, optimize your inventory levels, and ultimately enhance your business’s profitability and efficiency.
Remember, effective inventory management is not a one-time task but a continuous process. Keep these KPIs in check, and you’ll be well on your way to achieving better inventory control and operational success.
Feel free to reach out if you have any questions or need further clarification on any of these KPIs. Happy managing!