Setting up the right metrics for your inventory team is the key to improve profitability.
Here are 9 key metrics that you should monitor for inventory efficiency.
Inventory Turnover Ratio:
- Definition: Measures how often inventory is sold and replaced over a period.
- Calculation: Inventory Turnover=Cost of Goods Sold (COGS)/Average Inventory
- Target Setting: Higher turnover indicates efficient inventory management. The ideal target varies by industry but typically ranges from 5 to 10.
Days of Inventory on Hand (DOH):
- Definition: Indicates the average number of days it takes to sell the entire inventory.
- Calculation: DOH=Average Inventory/COGS per Day
- Target Setting: Lower DOH is preferred. Target varies but often ranges between 30 to 50 days, depending on the industry.
Gross Margin Return on Investment (GMROI):
- Definition: Assesses the profitability of your inventory.
- Calculation: GMROI=Gross Margin/Average Inventory Cost
- Target Setting: Higher GMROI indicates better performance. A GMROI of 1 means you’re breaking even.
Stockout Rate:
- Definition: Frequency of inventory being out of stock.
- Calculation: Stockout Rate=(Number of Stockouts/Total Inventory Requests)×100%
- Target Setting: Aim for as low as possible, generally below 2%. Learn more about setting safety stock here.
Order Accuracy Rate:
- Definition: Measures the accuracy of inventory orders.
- Calculation: Order Accuracy Rate=(Number of Accurate Orders/Total Orders)×100%
- Target Setting: Aim for high accuracy, typically above 98%.
Carrying Cost of Inventory:
- Definition: Total cost of holding inventory including storage, insurance, and obsolescence.
- Calculation: Carrying Cost=Total Inventory Cost×Carrying Cost Percentage
- Target Setting: Generally, it should be about 20-30% of your total inventory cost.
Backorder Rate:
- Definition: Indicates the percentage of orders that cannot be filled at the time of customer request.
- Calculation: Backorder Rate=(Number of Backorders/Total Orders)×100%
- Target Setting: Strive for a low rate, typically below 10%.
Inventory Accuracy:
- Definition: Compares physical inventory to what’s recorded in your database.
- Calculation: Inventory Accuracy=(Physical Inventory/Recorded Inventory)×100%
- Target Setting: Aim for high accuracy, ideally above 95%.
Return on Inventory Investment (ROII):
- Definition: Measures the return earned from inventory investment.
- Calculation: ROII=Net Profit from Inventory/Total Investment in Inventory
- Target Setting: The higher, the better; specific targets depend on industry benchmarks.
Final thoughts
Setting up the right metrics and closely following them is key to profitability of any ecommerce company. Hope these metrics give you the starting point to optimize your operations.
