You’ve launched your business and are getting orders from customers. As your customer base grows over time, you build an inventory of products to ship them as soon as possible and handle new customers. But how do you ensure that your inventory management runs like a clockwork? How do you take your business to the next level?
Business owners need to constantly monitor their inventory to ensure all processes are running smoothly. It enables them to understand customer behavior, gauge product demand, manage inventory better, increase efficiency & streamline costs.
Here are 7 Key Inventory Metrics every business owner needs to track regularly:
1. Inventory Turnover
Inventory Turnover is the number of times in a year, your business is able to completely sell its inventory. You don’t want to store too much inventory in a warehouse as it increases maintenance costs. A high inventory turn over is great for your business as it means that your business is efficiently using its inventory. It means that you are able to correctly asses what your customers want and turn stock into actual revenue. It is calculated as “Cost of Goods Sold” / “Average inventory”.
2. Cycle Time
Cycle Time is the amount of time taken from receiving the order to completing it. It’s basically the amount of time your customer has to wait after placing an order till product delivery. Low cycle times are good for your business because it means your customers have to wait less. It improves customer satisfaction and helps your business in the long run. Customers that are impressed by your turn around time spread the word about your brand and also give repeat business.
If you have long cycle times, then you can break it into smaller cycle times for each task in your supply chain (such as placing the order, making payment, packing the goods, transit time, etc.) to quickly identify the bottlenecks in your process and fix them.
3. Fill Rate
Fill Rate is the percent of orders your business is able to ship immediately using available stock, without back orders or lost sales. Higher the fill rate, higher the customer satisfaction. Initially, when your business is young, you can measure the overall fill rate regularly. As your business grows and you branch out to deliver more product categories and brands, you need to break out fill rates for each product category and brand.
Fill Rate is an amazing metric to forecast demand. If you see that a particular product item has a high fill rate, you can ramp up its stock to fulfill additional demand. Sometimes, you may see fill rates shoot up for certain products over certain times of the year, for example, winterwear in December. This helps you detect seasonal sales trends and stock products accordingly.
4. Order Status
Order Status tells you the current status of your order. It can be On-hold, Dispatched, In-transit, Delivered, Cancelled, etc. It’s important to monitor the number of orders in each status everyday. It shows the health of your delivery pipeline – how many orders have been delivered, how many are in transit, how many have been cancelled. If you see abnormally high percent of orders stuck in a particular stage of your delivery pipeline, for example, in transit, you can immediately look into it and take action to improve the pipeline velocity.
You can further break out these numbers for each category, brand and location to find the root cause of each issue and fix it quickly. Which product category has longest transit time? Which brand of products are cancelled the most? Which locations report the most number of incorrect deliveries?
5. Rate of Return
Rate of Return is the percent of shipped items that have been returned back to you. It can be due to various reasons – damaged goods, defects, long overdue, etc. You can group the returned orders based on the reason for return and monitor them regularly. This will tell you the most common reasons for return so you can fix the issues at their sources.
You can also break out the rate of return based on product category to find out what type of items are returned the most. For example, glassware and china are fragile items which are likely to get damaged in transit. Accordingly, you can change their packing methods to ensure they’re delivered properly.
Similarly, you can also analyze rate of return for each brand. This will help you identify which brands provide sub-standard products and you can either escalate this issue with their HQ or remove them from your inventory.
6. Back Order Rate
Back Order Rate is the percent of orders you’re unable to fulfill at the moment using your current inventory. It may be because you’re out-of-stock, inaccuracies in inventory, etc. A high back order rate means the customers have to wait longer till you fulfill their orders. This lowers customer satisfaction and increases the likelihood of order cancellation. It also means that you need to fine-tune your understanding of customer demand.
It’s essential to find out which type of items have high order rate by monitoring back order rates for each item. If you have too many product items to track you can monitor back order rates for each product category.
7. Perfect Order Rate
Perfect Order Rate tells you how many orders have been shipped without any issues (such as out-of-stock, defects, delay, etc). Every online business aims to maximize this metric. You need to monitor perfect order rates for each product category and brand. This will enable you to identify the efficiencies behind their delivery and replicate it for others.
Initially, you can begin by creating a simple Inventory Dashboard that you & your team can monitor regularly. This will help you identify operational efficiencies and improve inventory management. As you feel the need to track more metrics, you can always add more KPIs & charts to this dashboard.
Monitoring the key Inventory metrics regularly enables you to manage inventory processes efficiently, spot issues and fix them quickly. It also helps you identify areas of growth and improvement. A streamlined inventory boosts customer satisfaction, increases brand credibility and drives profits.
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