The Essential Inventory KPIs for Effective Supply Chain Management
In today’s fastpaced business world, efficient supply chain management is crucial for staying ahead. One of the cornerstones of effective supply chain management is inventory control. To manage inventory successfully, you need to track the right Key Performance Indicators (KPIs). These KPIs help you monitor performance, optimize processes, and ultimately improve your bottom line. Here’s a guide to the essential inventory KPIs you should consider for effective supply chain management.
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 efficient inventory management, reducing holding costs and minimizing the risk of obsolescence. Conversely, a low turnover ratio might suggest overstocking or slowmoving products.
How to Calculate It
Inventory Turnover Ratio
=
Cost of Goods Sold (COGS)
Average Inventory
Inventory Turnover Ratio= Average Inventory
Cost of Goods Sold (COGS)
​
Example If your COGS for the year is $500,000 and your average inventory is $100,000, your turnover ratio would be 5. This means you sold and replaced your inventory five times over the year.
2. Days Sales of Inventory (DSI)
What It Is DSI indicates the average number of days it takes to sell the entire inventory.
Why It Matters A lower DSI means faster inventory turnover, which is generally positive. High DSI can tie up capital and increase storage costs.
How to Calculate It
DSI
=
365
Inventory Turnover Ratio
DSI= Inventory Turnover Ratio
365
​
Example Using the turnover ratio from above (5), your DSI would be
DSI
=
365
5
=
73
 days
DSI= 5
365
​
=73 days
This means it takes an average of 73 days to sell your inventory.
3. Carrying Cost of Inventory
What It Is Carrying costs are the total costs associated with holding inventory, including storage, insurance, and opportunity costs.
Why It Matters Keeping these costs in check is essential for maintaining profitability. High carrying costs can erode margins and affect financial health.
How to Calculate It
Carrying Cost
=
Average Inventory
×
Carrying Cost Rate
Carrying Cost=Average Inventory×Carrying Cost Rate
Example If your average inventory is $100,000 and your carrying cost rate is 20%, your carrying cost would be $20,000.
4. Order Cycle Time
What It Is Order Cycle Time measures the average time taken from placing an order with a supplier to receiving the goods.
Why It Matters Shorter order cycle times can improve responsiveness to market demand and enhance customer satisfaction. Longer cycle times might result in stockouts or lost sales.
How to Calculate It
Order Cycle Time
=
Total Time for Orders
Number of Orders
Order Cycle Time= Number of Orders
Total Time for Orders
​
Example If you process 100 orders in a month and the total time for these orders is 1,500 hours, your order cycle time is
Order Cycle Time
=
1
,
500
 hours
100
 orders
=
15
 hours per order
Order Cycle Time= 100 orders
1,500 hours
​
=15 hours per order
5. Stockout Rate
What It Is The Stockout Rate measures the percentage of times inventory items are out of stock when customers attempt to make a purchase.
Why It Matters High stockout rates can lead to lost sales and customer dissatisfaction. Monitoring this KPI helps ensure you maintain optimal inventory levels.
How to Calculate It
Stockout Rate
=
Number of Stockouts
Total Number of Opportunities
×
100
Stockout Rate= Total Number of Opportunities
Number of Stockouts
​
×100
Example If you had 30 stockouts out of 1,000 customer opportunities, your stockout rate would be
Stockout Rate
=
30
1
,
000
×
100
=
3
%
Stockout Rate= 1,000
30
​
×100=3%
6. Fill Rate
What It Is Fill Rate measures the percentage of customer orders that are fulfilled completely and on time from the available inventory.
Why It Matters A high fill rate indicates efficient inventory management and strong customer satisfaction. A low fill rate suggests inventory or order fulfillment issues.
How to Calculate It
Fill Rate
=
Total Number of Orders Fulfilled Completely
Total Number of Orders
×
100
Fill Rate= Total Number of Orders
Total Number of Orders Fulfilled Completely
​
×100
Example If you fulfilled 950 out of 1,000 orders completely, your fill rate is
Fill Rate
=
950
1
,
000
×
100
=
95
%
Fill Rate= 1,000
950
​
×100=95%
Tracking these essential inventory KPIs will provide you with valuable insights into your inventory management practices. By focusing on these metrics, you can optimize your supply chain operations, reduce costs, and improve customer satisfaction. Remember, the key to effective supply chain management is not just in collecting data, but in interpreting it and taking actionable steps based on your findings. Happy managing!