8 Inventory Metrics Every Retailer Needs to Know

Inventory Metrics Retailers Needs to Focus On

Time is money, and in this case, inventory metrics also mean money. One needs to make the best stock decisions to positively shape one’s business. At the end of the day, business data is vital to generate actionable insights, and this data can be used for effective inventory management.

While explaining the above in greater detail, it must be mentioned that inventory metrics act as accurate indicators of stock control, allowing you to see how stock impact every small component of your business. Using inventory management techniques, you shall be able to compare your operational performance against industry standards and then benchmark the same over time. In order to do this, you need to compulsorily know the following inventory metrics:

1. 1. Establish an understanding of inventory turnover-
2. This defines the number of times inventory is sold per annum. You should be knowledgeable about this in order to understand why you might be seeing a low turnover as an example, which could be due to outdated goods, overstocking or problems with marketing efforts. Similarly, a stock inventory management system would be able to point out reasons for high turnover, possibly due to low stocks due to incorrect demand forecasts. You must keep holding costs in check to boost profitability when sale remains the same. This would be great for financial reports, which get highlighted in the event of an audit.
3. 2. Know about customer order fill rate-
4. This indicates the satisfaction levels for the services provided to customers, by showing the orders that they received on time.
   Formula-
   "Customer order fill rate= Orders shipped in full/ Total orders"
   Whenever you go below 100%, customers are likely to start thinking that you do not possess the ability to provide timely delivery, and reduced sales follow as a corollary. The solution here is to put your money into an inventory management software that will allow you to monitor inventory on a real-time basis.
5. 3. An average number of days taken to sell stock-
6. This tells you the average time taken for inventory to be converted into sales, or the time when cash remains locked as inventory.
   Formula- Average days for selling inventory= (Average stock/Cost of goods sold) x 365
   This metric is a great indicator of the efficiency of your inventory management system. As per the formula, the lower this number, the better it is for your business. However, the average days taken to sell would vary between industries due to differences in business models and products.
7. 4. Understand sales velocity-
8. Sales velocity= sales/distribution
   This is defined by how well products sell when they are available on the product shelves. If you are looking to carry out demand planning and eliminate zero stock situations, you need to constantly monitor this metric.
9. 5. Cycle time-
10. Cycle time is understood as the total amount of time taken from the moment an order is first placed till the moment it is completed. When you wish to give a realistic timeline to the customer, this metric becomes of prime importance. Setting such an expectation will also maximize customer satisfaction.
11. 6. Item fill rate-
12. You can measure order fulfillment performance for one or all deliveries in a stipulated time period.
    Formula- Item fill rate= Received quantity/ordered quantity
13. 7. Calculate your bottom line through Gross Margin Percent-
14. This indicates gross profit as a percentage of total sales revenue or selling price.
    Formula- Gross Margin percent= (Sales - cost of sales)/Sales
    This is one of the inventory management techniques which works in synchronization with inventory turnover. In case of a low gross margin, you may want to increase inventory turnover.
15. 8. Measuring inventory accuracy-
16. As it sounds, this simply shows how closely available inventory records match physical stock. At least 95% accuracy should be achieved, for an efficient system.

Taking count of the stock is extremely important to the success of a business, and its importance can never be underestimated. With modern techniques, you would need to use more and more technology, but it is also equally important to check if your business really needs a modern system or not. You may buy a basic software at the start and then add features as your business grows.

Source: Top 8 Inventory Metrics Every Retailer Needs to Know