Ready to learn how entrepreneurs track their inventory KPIs to run leaner, more profitable operations?
Entrepreneurs want to get the biggest profit possible from their operations. One sure-fire way to do that is to run tighter ships when it comes to inventory management.
That means:
- Lower carrying costs
- Higher margins
But there’s a problem…
Enterprises know next-to-nothing about their operations. If you aren’t tracking your inventory KPIs, you have no visibility into your margins or what’s really happening with your inventory.
Scary thought, right?
Inventory metrics aren’t just numbers. They’re the insights that keep your business healthy and profitable.
Luckily, this comprehensive inventory KPI tracking guide walks you through the most important KPIs every entrepreneur should track plus shows you how to actually use them to turn operations into a money-making machine.
Ready to get started?
You’ll learn:
- Why Inventory KPI Tracking Is Important
- The 5 Inventory KPIs Every Entrepreneur Should Track
- How To Start Tracking Your Inventory KPIs
- How To Turn Your KPI Data Into Profit
Why Inventory KPI Tracking Is Important
There are many benefits to tracking inventory KPIs. Here are a few of the biggest reasons to start tracking them ASAP.
Stop Leaving Money On The Table
Bad inventory management is incredibly costly.
Recent studies show businesses lose $1.6 trillion USD annually due to inventory shrinkage and inaccuracies. Between stockouts, overstocking, damaged goods, and more.
And that number gets even worse…
43% of SMB’s don’t track inventory properly or use antiquated manual systems. That means almost half of all small businesses are losing money on bad inventory everyday.
Tracking inventory KPIs allow you to identify areas of improvement before they cost you money. You’ll know which products aren’t moving to prevent overstock. You’ll be able to better predict demand so you don’t run out of your best sellers.
Makes sense, doesn’t it? By tracking the proper inventory metrics, you protect your bottom line.
Improve Your Operational Efficiency
Want to know how your business is really performing? Track your inventory KPIs.
Think of inventory KPIs as your business’s vital signs. They help you know when things are running smoothly and when there’s trouble ahead.
Using inventory optimization methods by tracking inventory KPIs gives you insights into every corner of an operation. Issues with suppliers? Inventory pile ups? KPI tracking will reveal them.
Want to know the crazy part?
Monitoring inventory KPIs can lead to a 20% decrease in costs. That’s according to research that found businesses utilizing data for inventory decisions were able to trim costs.
Lesson? You can’t improve if you don’t measure.
The 5 Inventory KPIs Every Entrepreneur Should Track
Alright, let’s jump into the good stuff. These are the inventory KPIs that matter. These are the metrics that will tell you what’s working and what isn’t. Learn about each of these and implement them right away.
Inventory Turnover Rate
This is going to be your north star.
Why? Your inventory turnover rate tells you how quickly your products are selling. A high number means you are constantly selling out. A low number means you might have too much stock.
While the average inventory turnover rate is around 8.5X, this changes depending on your industry.
If your turnover rate is below the industry average, now’s the time to look deeper into your metrics.
Carrying Costs of Inventory
Another big one. This metric tells you how much it’s costing you to carry your current inventory levels.
A lot of entrepreneurs don’t realize just how expensive it can be to sit on excess stock. Your carrying cost includes:
- Warehousing/storage costs
- Insurance/Taxes
- Depreciation
- Opportunity cost of your invested capital
A good rule of thumb is your carrying costs should be between 20-30% of your total inventory cost. If yours is starting to creep up, now’s the time to take action.
Stockout Rate
Ask yourself this, how often are you running out of stock?
Stockouts equal missed sales. But did you know 69% of online shoppers will go to a competitor website if your product they want is out of stock?
Essentially a stockout doesn’t just cost you that sale, it costs you the customer entirely.
Days Sales Of Inventory (DSI)
DSI shows you the number of days it takes to turn your inventory into sales. The lower your DSI, the better.
Here’s how you calculate it: Average Inventory / Cost of Goods Sold x 365.
Monitoring how long your products sit before being sold is critical. If your DSI is increasing, that’s a sign products are taking longer to sell and your cash is being tied up for longer.
Gross Margin Return On Investment (GMROI)
Want to know how much profit you’re making for every dollar you have invested in inventory?
GMROI is the metric for you. All it takes is this simple equation:
Gross Margin / Average Inventory Cost
If this number is over 1.0 you are making a profit on your inventory. Below 1.0 and you’re losing money.
Simple enough, right? This one metric can help you decide which products to keep and which to dump.
How To Start Tracking Your Inventory KPIs
You don’t need fancy tools to start tracking inventory KPIs. Any entrepreneur can do this with a spreadsheet. Follow along with these tips:
Establish Your Baseline
The first step is to understand where things currently stand. Dig up as much recent inventory data as possible. You’ll want to know your:
- Current Inventory Levels
- Sales numbers for the past year
- Cost of goods sold
- Warehousing/storage costs
Gather up that data and you’re ready to start tracking.
Pick Your Top 3 Inventory KPIs To Monitor
You don’t have to monitor every metric under the sun. Pick the top 3 that will benefit the business the most and prioritize those.
For most businesses, starting with inventory turnover rate, stockout rate and inventory carrying costs is recommended.
Review Weekly, Make Changes Monthly
Make it a habit to sit down once a week to review inventory metrics. But don’t go crazy making adjustments each week.
Instead, look for monthly trends and adjust according to what the data is telling you.
Remember, the goal isn’t to become a data wizard. The goal is to identify trends that will lead to more profitability.
Wrapping Up
Inventory KPI tracking is how entrepreneurs run leaner, more profitable operations. Without proper inventory data, you’re literally running your business blind.
With KPI tracking, you can:
- Lower expenses by identifying waste within your supply chain.
- Sell more of what your customers want
- Reduce time wasted managing inventory.
Inventory KPI tracking is simple. But it does take discipline. Start with these basics, build your inventory metrics over time, and let the data lead you to profitability.
Entrepreneurs that measure what matters end up winning the game. Start tracking your inventory KPIs today and watch your operation transform before your eyes.
