Inventory Control: Measure Your Inventory Management Performance in 5 Steps
You may think you’ve mastered inventory control, but do you really know how you are performing? Your inventory management system may have holes that are leaking money. The best way to size up your performance and make appropriate changes is to look at the right key performance indicators (KPIs).
These metrics will tell you how effective your strategy is, where it excels, and where there is room for improvement.
Here’s how to assess your current performance:
Calculate Your Gross Margin
Don’t overlook your gross margin – your total sales revenue minus the cost of goods sold (COGS) – divided by total sales revenue. This percentage tells you how much revenue your company keeps after subtracting the costs associated with the production of goods. Gross margin is a basic business formula that enables a company to balance its income and expenses and make a profit. Calculate your current gross margin, and see how you’re performing overall. The higher your percentage, the more you retain on each sale. A poor gross margin may point to the need to improve areas of business, such as inventory control.
Check Your Average Inventory Level
Next, check your inventory levels to see how accurate they are according to your target. Inventory level accuracy is especially important to small businesses that don’t have ample cash flow to correct miscalculations. For small businesses, over- or under-ordering inventory can mean major losses, even business failure. Count your inventory and compare the numbers to your targets – data you can obtain with the right inventory management software. Your goal should be to reduce your average inventory level without negatively impacting sales and other metrics.
Analyze Your Item Fill Rate
Fill rate is an important business key performance indicator (KPI). In basic terms, item fill rate is the speed at which you meet orders compared to the total order. It deals with the demands of your customers and looks at how likely you are to successfully serve them. Your fill rate is a ratio of the actual orders you fill in terms of parallel demands. For example, if customers order 100 units of a product, but your inventory can fill an order for 50 units only, your fill rate is 50%. The health of your fill rate is crucial, as it affects your relationships with customers. Shoot for a 100% fill rate for optimal performance.
Learn Your Turnover Ratio
Inventory control is all about finding and sustaining an ideal turnover ratio. You need to balance your inventory with your customer demands. Your turnover ratio tells you whether your average inventory levels are appropriate for sales. You typically want to have a large turnover number to show that your sales are greater than your inventory levels (the goal of an optimized inventory as long as it does not affect customer service). Calculate your turnover ratio by dividing your annual sales by your average inventory level. If you come up with five, for example, this means you sell five times more than you keep in inventory – a positive KPI.
Invest in Smart KPI Software
Help is available for tracking and optimizing your inventory management performance. Smart software solutions exist to enable business owners to keep up with inventory management demands, consistently track KPIs, and easily make changes to optimize operations. You don’t have to be an inventory expert to get a handle on your supply chain. Simply invest in the right software and watch your enterprise shine.
Want more information on a great inventory management software for your business needs?