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Efficient inventory planning processes are vital for a healthy cash flow. Demand forecasting and optimizing inventory levels are, however, complex matters; from analyzing your historical sales and planning your purchases to getting products into the hands of your customers where and when they want them. How do you know if your processes are efficient in optimizing your inventory and saving you time and money over time? As within any part of a successful business, it is important to track the performance of your inventory planning efforts. Setting goals and corresponding KPIs to track your progress is key to understanding your pain points and organizing your efforts in the best way.
In this article, we’ll take a look at what inventory planning KPIs every brand should track and why.
KPIs offer information about how your business is doing. They let you know how your efforts are affecting turnover, sales, demand, costs, process success, relationships, and more. Without tracking, reaching your goals will be a wild goose chase. As inventory planning is a tricky venture, tracking is key to making sure you are on the right path.
Benefits of tracking KPIs to reach your inventory planning goals:
KPIs on costs, sales, and turnover will help you determine optimal inventory levels. In effect, you can avoid overstocks and their corresponding costs. More efficient processes will save you time on manual work, especially with the help of inventory planning software that lets you overview your KPIs in intuitive dashboards and take immediate action.
Figuring out your optimal inventory levels and continuously tracking your turnover and sell-through rate will inform you of your best-selling products and improve future decisions and forecast accuracy.
Continuously tracking KPIs will help streamline your processes and make forecasting and planning smoother. It can help you automate part of your purchasing and replenishment.
In the long run, establishing efficient inventory planning processes will help you:
Read more about the importance of efficient inventory planning processes in this article.
There is a plethora of KPIs a brand can track to ensure they are on the right path within any part of their business. Depending on your goals what metrics you should track will vary, and it is important that you determine the right KPIs for your specific business needs and goals.
As it pertains to supply chain management there are many important metrics to track in regards to how to handle inventory, plan assortment long term and work with production and lead time efficiency that will have an impact on your inventory health. This article will focus specifically on metrics that will help you optimize and monitor your inventory planning processes rather than inventory handling processes.
It is important to note, however, that no function operates in silos and the KPIs still need to be anchored and shared across your organization. Read more about building a good collaboration between marketing and supply chain in this article.
Before we get to the KPIs, there are some key things to consider when choosing and tracking yours. As we have stated above it is imperative that your KPIs are connected to your goals. Without tracking you will be fumbling in the dark trying to reach your goals. In turn, there is also no use in looking at metrics if they are not connected to a goal. Ditch vanity metrics, limit the number of KPIs and revise the metrics if they aren’t relevant. Make sure you review your pain points and your goals closely and set your KPIs accordingly. The SMART approach to goal setting is a good way to ensure that they align with your strategic objectives and overall business goals: specific, measurable, attainable, relevant, and time-based.
Now, let’s look at the KPIs.
The following list is not exhaustive. As we have outlined above, additional KPIs might be integral for your business to track depending on your goals. No matter your objectives, these are the metrics we believe all brands need to track in order to ensure good inventory health to promote growth.
This measure is a key indicator of the effectiveness of your inventory planning processes. A higher turnover typically indicates higher efficiency. A low turnover could be an indicator of weak sales but also of excess inventory. The optimal ratio will be subject to your current goals, but a medium-high turnover is ideal as an indicator of your ability to sell your goods and restock them in time.
This informs you of how large your stock is. It is relevant in relation to your sales goals and liquidity. A large stock might be needed to meet sales but also comes with higher risks. If your stock value is higher than needed for your projected sales you are likely sitting on overstock in some parts of the inventory.
The stock value is of course also tied to additional costs of carrying that inventory (warehouse, insurance, rent, labor, etc) which can be helpful to track you along with your turnover rate to inform you of the full costs of your stock.
The definition of overstock varies from brand to brand; it is dependent on your sales cycles and how much your assortment is subject to seasonality or affected by perishable goods. No matter the cause, a high overstock value has a great impact on your cash flow and liquidity and in turn your growth. In the following articles, you can learn how to identify and reduce overstock inventory.
Deadstock is the inventory no one wants to buy. This can also refer to items you can no longer sell because they have expired such as food or skincare. The percentage of deadstock is an important metric as it relates to your competitiveness. A large deadstock indicates that you are not competitive in the market. What is considered deadstock will vary from business to business depending on the nature of your business, the industry it operates in, and the type of goods it sells.
In short, these are measures for how long it takes for you to move your inventory. It is an indicator of your sales efficiency and informs you of if you have inventory to cover your projected sales. It lets you know if you have properly forecasted demand and if your inventory planning processes are efficient. Together with your lead times, it informs your replenishment cycles.
Sell through rate measures the total amount of inventory that is sold within a given period relative to the amount of inventory received from your suppliers during the same period. This is a strong indicator of if your stock is selling fast enough during said period to generate sufficient profit. Ideally, this would be at 80%(higher could mean you are looking at stockouts) but is often between 40%-80% depending on your current goals for different parts of your inventory.
This metric shows how accurate your forecasts are to the actual sales results. Accuracy in sales forecasting is the prerequisite for reliable inventory planning. It is a determining factor for ensuring stock availability, maximized sales, and a healthy cash flow. Tracking its accuracy will help you review and revise your forecasts to better reflect demand and increase your sales, boost your stock turnover and lower the risk och overstock as well as your inventory-related costs.
Demand forecasting is admittedly hard. Madden Analytics offers powerful forecasting models to help you forecast demand based on historic and real-time data.
Lost sales ratio
The lost sales ratio is the number of days an item is out of stock compared to its expected sales rate. It indicates when your inventory levels are too lean.
Stockouts, or out-of-stocks, is the percentage of products not in stock when a customer places want to buy them. This is a costly indicator of your ability to meet demand. Learn more about stockouts and how to avoid them in this article.
Service level is the percentage of customers who do not encounter stockouts. This metric is useful to balance overstock costs and stockout costs as a result of your ability to fulfill orders.
Once your KPIs are set you need routines in place to follow up on and regularly communicate them across the organization. It is imperative that the different functions know about and understands the KPIs, how they relate to your goals, and how to contribute to the outcome.
As a final note, the key to a meaningful inventory metric is collecting accurate data, and doing so efficiently. Gathering accurate inventory data, while exerting minimal manual effort, is best achieved using inventory management software. Madden Analytics integrates with your other business systems and lets you view and analyze your data in real time. It is complete with intuitive dashboards letting you monitor important KPIs and set up custom reports. Set up a free demo to learn more!