Table of Contents
Table of Contents
Inventory KPIs for retail are essential for efficient inventory management in the dynamic retail sector. They offer insights into stock levels, sales trends, and financial health, crucial for balancing customer satisfaction with profitability.
Understanding these KPIs enables retailers to make informed decisions, enhancing operational efficiency and customer satisfaction. This article explores 20 key inventory KPIs, guiding retailers to optimize their inventory strategies in today’s competitive market.
20 inventory KPIs for retail and how to improve them
From tracking sales patterns to optimizing stock levels, inventory KPIs are indispensable tools for retailers. Presented alphabetically for easy reference, they encompass a comprehensive approach to inventory management in retail:
- Average inventory
- Backorder rate
- Carrying cost of inventory
- Cost of goods sold (COGS)
- Days sales of inventory (DSI)
- Demand forecast accuracy
- Gross margin return on investment (GMROI)
- Inventory accuracy
- Inventory turnover
- Lead time
- Order accuracy rate
- Product performance
- Rate of return
- Safety stock level
- Sell-through rate
- Shrinkage rate
- Stock to sales ratio
- Stockout frequency
- Total inventory cost
- Warehouse space utilization rate
Average inventory
Formula: (Beginning Inventory + Ending Inventory) / 2
Average inventory calculates the mean value of inventory over a specific time period, typically a month. This KPI is crucial for understanding how much stock a business typically holds. A lower average suggests efficient inventory use and lower holding costs, while a higher average might indicate overstocking or slow-moving products.
It’s essential for assessing the balance between having enough stock to meet demand and minimizing carrying costs. Data for this KPI is typically found in financial and inventory management systems.
If average inventory is unusually high, it could be due to over-purchasing, slow sales, or poor inventory management. High average inventory can tie up capital and increase storage costs.
How to improve average inventory:
- Regularly review and adjust inventory levels based on sales trends.
- Implement just-in-time (JIT) inventory practices to reduce excess stock.
- Use inventory management software for better forecasting and planning.
- Conduct frequent inventory audits to identify slow-moving items.
- Improve demand forecasting to align inventory levels with expected sales.
Backorder rate
Formula: (Number of Backordered Items / Total Number of Ordered Items) x 100
Backorder rate tracks the frequency at which customers’ orders cannot be fulfilled from current stock, expressed as a percentage. A lower backorder rate is desirable as it indicates that most customer demands are being met promptly.
This KPI is critical for assessing stock availability and customer satisfaction. The data can be sourced from sales and inventory management systems.
A high backorder rate often points to issues like understocking, supplier delays, or inefficient inventory management.
How to improve backorder rate:
- Enhance inventory forecasting to better match supply with anticipated demand.
- Strengthen relationships with suppliers for quicker restocking.
- Implement an inventory management system for real-time stock visibility.
- Regularly review and adjust safety stock levels.
- Analyze sales trends to anticipate seasonal demand changes.
Carrying cost of inventory
Formula: (Storage Costs + Insurance + Obsolescence + Opportunity Costs) / Total Inventory Value
The carrying cost of inventory encompasses all costs associated with holding and storing unsold goods. These costs typically include storage, insurance, taxes, and depreciation. A lower carrying cost is better, indicating efficient inventory management.
It’s a vital measure for understanding the true cost of inventory. This information is usually gathered from financial records and inventory reports.
High carrying costs can be a result of overstocking, inefficient storage, or poor inventory turnover.
How to improve carrying cost of inventory:
- Optimize warehouse layout to maximize space utilization.
- Regularly review inventory levels to avoid overstocking.
- Implement an efficient inventory management system.
- Negotiate better rates with storage facilities and insurers.
- Dispose of obsolete inventory in a timely manner.
Cost of goods sold (COGS)
Formula: (Beginning Inventory + Purchases During the Period – Ending Inventory)
COGS represents the direct costs associated with the production and sale of goods. This includes the cost of materials and labor directly used in creating the product. A lower COGS is typically better as it indicates higher efficiency in production and procurement.
Tracking COGS is essential for understanding product profitability and overall business health. The data for COGS is found in accounting and inventory management systems.
If COGS is high, it might suggest high material costs, inefficient production, or wastage.
How to improve cost of goods sold:
- Negotiate better prices with suppliers.
- Improve inventory management to reduce waste and shrinkage.
- Optimize production processes for efficiency.
- Implement quality control measures to reduce defects and returns.
- Use lean manufacturing principles to minimize unnecessary costs.
Demand forecast accuracy
Formula: (Actual Demand – Forecasted Demand) / Actual Demand
Demand forecast accuracy measures how close the forecasted demand for products is to the actual demand. A higher accuracy percentage is ideal, indicating effective forecasting.
Accurate demand forecasting is vital for inventory planning, reducing stockouts and overstock, and preventing operational shrink. This data is typically gathered from sales records and forecasting systems.
Inaccurate demand forecasting can be due to unexpected market trends, ineffective forecasting methods, or lack of historical sales data.
How to improve demand forecast accuracy:
- Use advanced forecasting tools that incorporate AI and machine learning.
- Regularly review and update forecasting models with new sales data.
- Collaborate with sales and marketing teams for market insights.
- Monitor industry trends and seasonal variations.
- Implement continuous feedback loops to refine forecasts regularly.
6. Gross margin return on investment (GMROI)
Formula: (Gross Margin / Average Inventory Cost) x 100
GMROI evaluates the profit return on the amount invested in inventory. A higher GMROI is better, indicating efficient inventory investment and profitability. It’s crucial for retailers to understand how effectively their investment in inventory is generating profits. The data needed for GMROI calculation can be obtained from financial and inventory management systems.
Low GMROI might result from high inventory costs, low sales prices, or poor inventory turnover.
How to improve gross margin return on investment:
- Increase sales prices where feasible without affecting demand.
- Improve inventory turnover through effective sales strategies.
- Negotiate better purchasing terms with suppliers to reduce inventory costs.
- Implement clearance sales for slow-moving inventory.
- Focus on high-margin products to boost overall profitability.
Inventory accuracy
Formula: (Correct Inventory Items / Total Inventory Items) x 100
Inventory accuracy measures how closely the physical inventory matches the records in a company’s inventory management system. A higher percentage indicates better accuracy.
Accurate inventory records are essential for effective inventory management, reducing stockouts, and preventing overstocking. This KPI’s data comes from regular inventory audits and reconciliations.
Inaccurate inventory records might be due to human error, theft, or poor inventory tracking systems.
How to improve inventory accuracy:
- Conduct regular physical inventory counts.
- Implement a robust inventory management system.
- Train staff on proper inventory handling and recording procedures.
- Use barcode or RFID systems for accurate tracking.
- Regularly reconcile physical counts with system records.
Inventory turnover
Formula: Cost of Goods Sold / Average Inventory
Inventory turnover measures how often inventory is sold and replaced within a certain period, typically a year. Higher turnover indicates efficient management and high demand for products. It’s essential for understanding how quickly a business is moving its inventory. Data for this KPI is typically found in financial and inventory records.
Low inventory turnover might indicate overstocking, declining sales, or poor inventory management.
How to improve inventory turnover:
- Optimize pricing strategies to increase sales.
- Implement effective marketing and promotions.
- Regularly review and adjust inventory levels based on sales data.
- Diversify product offerings to cater to a wider market.
- Enhance supplier relationships for faster restocking.
Lead time
Formula: Time from Placing Order to Receiving Order
Lead time measures the duration from when an order is placed with a supplier to when it is received. A shorter lead time is preferable as it indicates more efficient supply chain management. This KPI is crucial for planning inventory levels and ensuring timely stock availability. Data for lead time is usually found in purchase and inventory management systems.
Extended lead times can be due to supplier inefficiencies, logistical challenges, or poor order planning.
How to improve lead time:
- Establish better communication with suppliers for faster processing.
- Choose suppliers with shorter delivery times.
- Implement efficient order processing systems.
- Explore alternative transportation methods for quicker delivery.
- Build a buffer stock to mitigate the impact of long lead times.
Order accuracy rate
Formula: (Accurate Orders / Total Orders) x 100
Order accuracy rate tracks the accuracy of inventory orders against what is received. A higher rate is better, indicating precise ordering and receipt of inventory. This KPI is key for ensuring that stock levels are correctly maintained and that orders meet business needs. Data for this metric comes from order processing and inventory management systems.
Low order accuracy can result from miscommunication with suppliers, errors in ordering processes, or inventory miscounts.
How to improve order accuracy rate:
- Implement double-checking procedures for order placements.
- Use electronic ordering systems to reduce manual errors.
- Strengthen communication with suppliers for clear order specifications.
- Regularly audit received orders against purchase orders.
- Train staff on accurate order processing and verification techniques.
Product performance
Formula: Product Performance = (Sales of Product / Total Sales) x 100
Product performance measures the sales contribution of specific products or categories to the total sales. It’s calculated by dividing the sales of a particular product by the total sales, then multiplying by 100. A higher percentage suggests strong product performance.
This KPI is important for identifying top-performing products, informing stock decisions, and guiding marketing strategies. Data for this metric is typically found in sales and inventory management systems.
Poor product performance may be due to market trends, inadequate marketing, or misalignment with customer preferences.
How to improve product performance:
- Conduct market research to understand customer needs and preferences.
- Increase marketing efforts for underperforming products.
- Reassess pricing strategies to align with market demand.
- Offer promotions or discounts to boost sales of lagging products.
Rate of return
Formula: Rate of Return = (Number of Returned Items / Total Number of Items Sold) x 100
Rate of return indicates the frequency of product returns, calculated by dividing the number of returned items by the total number of items sold, multiplied by 100. A lower rate is better, as it suggests higher customer satisfaction and product quality.
This KPI is crucial for assessing product quality, potential external theft, customer satisfaction, and the effectiveness of return policies. Data for this KPI can be sourced from sales and returns records.
High return rates may result from poor product quality, misleading product descriptions, or customer dissatisfaction.
How to improve rate of return:
- Enhance product quality through better quality control measures.
- Provide accurate and detailed product descriptions.
- Collect customer feedback to understand reasons for returns.
- Improve customer service to address issues promptly.
Safety stock level
Formula: Safety Stock Level = (Maximum Daily Usage x Maximum Lead Time) – (Average Daily Usage x Average Lead Time)
Safety stock level is the amount of extra inventory kept to prevent stockouts. It’s calculated based on the maximum and average usage and lead time. Maintaining an optimal safety stock level ensures continuous product availability without overstocking. This KPI is essential for balancing inventory risk and service level. Data for this metric is typically found in inventory management systems.
Inadequate safety stock levels can result from poor demand forecasting, unexpected demand spikes, or supplier unreliability.
How to improve safety stock level:
- Regularly review and update demand forecasts.
- Develop better relationships with suppliers for reliable lead times.
- Use inventory management software for accurate tracking.
- Periodically reassess safety stock levels based on historical data and market trends.
Sell-through rate
Formula: Sell-Through Rate = (Number of Units Sold / Number of Units Received) x 100
The sell-through rate measures the percentage of inventory sold within a specific period compared to the inventory received. It’s calculated by dividing the number of units sold by the number of units received, then multiplying by 100. A higher sell-through rate indicates efficient inventory turnover and alignment with customer demand.
This KPI is important for evaluating product demand and inventory management efficiency. Data for this metric is obtained from sales and inventory records.
Low sell-through rates may be caused by overestimating demand, poor marketing, or misaligned pricing strategies.
How to improve sell-through rate:
- Align inventory levels with accurate demand forecasting.
- Implement targeted marketing strategies to boost product visibility.
- Adjust pricing to reflect market demand and competition.
- Offer promotions or discounts to stimulate sales.
Shrinkage rate
Formula: Shrinkage Rate = (Recorded Inventory – Actual Inventory) / Recorded Inventory x 100
Shrinkage rate measures the loss of inventory due to factors like theft, damage, or administrative errors. Shrink in retail is calculated by subtracting the actual inventory from the recorded inventory, dividing the result by the recorded inventory, and then multiplying by 100. A lower shrinkage rate is better, indicating fewer losses and better inventory control.
This KPI is crucial for assessing the effectiveness of loss prevention strategies. Data for this metric comes from inventory audits and financial records.
High shrinkage rates can be due to theft, employee misconduct, or poor inventory management.
How to improve shrinkage rate:
- Implement robust security measures, including security systems like Solink.
- Conduct regular inventory audits to identify discrepancies.
- Train staff on proper inventory handling and loss prevention.
- Enhance inventory tracking and management systems.
Stock to sales ratio
Formula: Stock to Sales Ratio = Average Inventory / Net Sales
The stock to sales ratio compares the average inventory to the net sales. It’s calculated by dividing the average inventory by the net sales. A lower ratio indicates efficient inventory management, as it suggests a good balance between stock levels and sales.
This KPI is important for optimizing inventory levels and reducing carrying costs. The necessary data can be sourced from financial and inventory records.
A high stock to sales ratio may indicate overstocking, declining sales, or inventory mismanagement.
How to improve stock to sales ratio:
- Regularly adjust inventory levels based on sales trends.
- Improve demand forecasting to avoid overstocking.
- Increase sales efforts for slow-moving inventory.
- Implement discounts or promotions to clear excess stock.
Stockout frequency
Formula: Stockout Frequency = (Number of Stockouts / Total Number of Inventory Items) x 100
Stockout frequency measures how often items are out of stock, calculated by dividing the number of stockouts by the total number of inventory items, then multiplying by 100. A lower frequency is preferable, as it indicates better inventory management and customer satisfaction.
This KPI is crucial for monitoring inventory availability and predicting potential sales losses. Data for this metric is typically found in inventory management systems.
Frequent stockouts may be caused by poor inventory planning, unexpected demand surges, or supply chain disruptions.
How to improve stockout frequency:
- Enhance inventory forecasting and planning.
- Develop contingency plans for supply chain disruptions.
- Maintain optimal safety stock levels.
- Regularly review and adjust inventory replenishment strategies.
Use Solink to supplement your inventory management system
Integrating Solink with your inventory management system can significantly enhance the effectiveness of your retail operations. Solink’s advanced video monitoring and analytics capabilities offer a unique perspective, allowing for a more comprehensive understanding of inventory movement, customer interactions, and potential security issues.
This powerful combination can lead to reduced shrinkage, improved inventory accuracy, and better-informed decision-making. By leveraging Solink alongside your inventory KPIs, you can unlock deeper insights, drive efficiency, and ultimately enhance the overall performance of your retail business.
To see how Solink can improve your retail inventory KPIs, sign up for a demo today.