Examples of Inventory Control Performance Metrics

by Fraser Sherman, Demand Media Buying unnecessary inventory costs your business money. Conversely, inadequate inventory can lose sales. Accountants and analysts have developed a number of metrics for judging how efficiently your company controls its inventory. Possible measurements include lost sales, inventory turnover, industry comparisons, cycle time and the item fill rate. Sponsored Link Supply Chain Planning See what Quintiq can do for your supply chain. Learn more. www.Quintiq.com/Supply-Chain Lost Sales The lost sales metric measures how many customers ask for an item, then go elsewhere because you don't have it in stock. Businesses using this metric often track back orders - reserving part of the next scheduled shipment for the customer to purchase -- as well as lost sales. Using both metrics will give you an idea of the gap between your inventory and your customers' needs. Inventory Turnover Turnover measures how fast your business uses up and replenishes its inventory. The higher the turnover, the less time your inventory spends sitting on the shelves. You can measure turnover by dividing the cost of sales into the value of your average level of inventory or by calculating the number of days of inventory supply you have on hand. Cycle Time Cycle time is a measure of how fast you or your suppliers can complete a particular inventory process. The time it takes from a customer's purchase order submission to your company's delivery of the order is one important cycle, for example. You can break this down into several smaller cycles, such as the time it takes to process a purchase order, for more precise analysis. Item Fill Rate

The item fill rate is the percentage of items a customer ordered that your company was able to ship. The lower the ratio, the poorer your inventory performance. You should track not only the fill rate for each individual order but the fill rate for all orders -- what percentage of orders go out completely filled, and what percentage have items missing. Industry Comparisons Your company doesn't exist in a vacuum. Industry comparisons take metrics, such as your cycle time or turnover rate, and compare them with other companies in your field. Determining how your metrics compare to your competitors' gives you a way to judge whether your inventory control meets the industry norm, falls short or exceeds it. Inventory Accuracy You can't manage inventory if you don't know what you have in stock. Good inventory management requires at least 95 percent accuracy. This mandates regular inventory counts, which you can do by taking a random sampling of stock and seeing if you spot anything missing. You should count the items that generate most of your sales several times a year; bottom-tier items only need an annual count.

Key Performance Indicators for Inventory

Inventory is one of the most significant costs for many businesses so ensuring its optimization is often a key company objective. Luckily there are a variety of key performance indicators (KPIs) that can be used to assess inventory performance, whether focusing on the economics or performance of stock. Below we are listing 5 commonly used KPIs for you to understand it all :

1. Inventory Turn over Inventory Turn tells you how many times inventory has been sold and replaced in a given period calculated as Sales divided by average inventory value whilst mileage may vary depending on the industry a low inventory turn can be indicative of holding too much stock (or stock of the wrong type).

2. Stockouts Stockouts indicate where a demand cannot be met due to the absence of the required inventory monitoring these will tell you if you have the right mix of stock type and quantity.

3. Service Level Service levels can be calculated per individual customer and is calculated by reviewing the number of times an item has been issued divided by the number of times it has been demanded a low service level will indicate that customers invariably have to wait for parts and that inventory held could be of the wrong type.

4. Lead Time Lead time is the length of time it takes to obtain inventory from suppliers Long lead

times can result in holding excess inventory (impacting cost and service level) 5. Stock Cover Stock cover is the length of time that inventory will last if current usage continues this is an important indicator as it helps appraise the impact of changes in lead time or the potential for running out of stock.

The

Key

Performance

Indicators

for

Small

Business

Inventory Management Posted on March 7, 2011 by ritaCrunch Small business owners know that inventory costs money, but not all are proactive enough to establish where these costs come from and how to measure their impact. Inventory is a company asset. As such, it must be managed with respect to several criteria. When small businesses look to measure their performance with respect to inventory management, they must establish their key performance indicators, commonly referred to as KPI. These key performance indicators allow small businesses to not only better manage their inventory, but to better establish the priorities within their inventory management practices. In addition, these performance indicators are also used to measure how well inventory managers isolate costs and mitigate their effects. So, what are th e 5 key performance indicators with respect to small business inventory management? Monthly Inventory Value

Well start with the most recognized inventory KPI. In this case, the value of a companys inventory at the end of the month is a strong indicator o f the companys ability to match its inventory levels to its manufacturing needs and sales forecasts. Small businesses must adhere to stringent limits on the value of inventory within a given month. Some businesses extend this KPI to analyzing the inventor y value over a quarter. This requires companies set

limits on inventory value relative to their market or industrys fluctuating demands. Value of Raw Material & Part Consumption

One of the key performance indicators for small manufacturers must include in ventorys ability to match raw material & part consumption with manufacturings requirements. In this case the approach is to measure the continued supply of these materials and parts and to ensure no production delays occur because of a lack of supply. Th e KPI in this case would measure the incidence and duration of a delay caused by a lack of available materials & parts. Incidence of Out of Stock (OOS)

Similar to the KPI for raw material & part consumption, the incidence of stock - outs is also a key performance indicator. However, in this case, its the measurement of the lack of finished product inventory needed for current sales. The question therefore becomes, how many times have customer orders been unfulfilled because of a lack of available invento ry of finished product? Understanding this KPI involves measuring the length of time of the stock-out and its impact on costs. Has the company had to incur expedited freight costs to rush parts and materials in? If so, that will not only impact his KPI, but the aforementioned raw material & part consumption KPI. Value of Obsolete & Damaged Inventory

This KPI measures the costs relative to obsolete and damaged inventory. Small businesses must set goals and objectives predicated on controlling the incidence of damaged inventory caused by poor handling. Reducing the impact of obsolete & damaged inventory will allow the small business to reduce inventory costs. In most cases, damaged inventory can only be sold as scrap. Regardless of a companys business model, all should have this as a one of their key performance indicators within their inventory

management practices. Most companies immediately identify those products

likely to become obsolete and take proactive measures to immediately liquidate that inventory. Incidence of Product Returns

One of the most important inventory key performance indicators includes the incidence of products returned by RMA (return material authorization). In this case, the cost is twofold. One is the original cost to purchase parts and materials to manufacture these products. The other is the cost to take these products back. This often involves paying for freight if the company is liable for defective product. While this is an inventory key performance indicator, it can easily apply to several departments within a small business. Sales may have quoted the wrong part. Customer service may have entered the wrong part in order entry, and the shipping department may have accidentally shipped the wrong part. Regardless of the size of your company, taking the time to establish these key performance indicators will lead to more efficient inventory

management practices. The focus is on identifying those costs that impact a companys gross profit and ultimately, its bottom line. When setting th ese key performance indicators, be sure to match them to your companys business model and approach. If your business is built on cyclical and seasonal customer demand patterns, then perhaps the first key performance indicator on monthly inventory value sh ould be extended to measuring inventory value by quarter. Whatever the case, key performance indicators allow companies to immediately identify issues of concern and be proactive in addressing them