Chapter 9. What Are Inventory Management KPIs and Metrics?

Welcome to Chapter 9 of our inventory management guide. In this chapter, we will cover inventory management KPIs and metrics that you will use to measure the effectiveness of your operations. It takes time to determine which KPIs and metrics to measure and spot the difference between vanity and actionable metrics.

So, you’ll find that how you measure your performance will change the longer you work in inventory management, and as your operations grow and evolve.

What’s the Difference between a KPI and a Metric?

KPI stands for ‘Key Performance Indicator,’ and they are used to track progress toward specific goals, while metrics are general data points used for performance measurement. With a KPI, you would have set a goal based on past performance. For example, a goal to replenish inventory at a certain daily rate. Metrics are not based on goals. They just show you how well you’re operating.

Why Measure KPIs and Metrics?

KPIs and metrics are vital to gauging efficiency in inventory management. Their primary purpose is to:

• Help maintain service levels—keeping a watchful eye on KPIs and metrics helps keep inventory balanced so you don’t lose grip on incoming and outgoing stock.
• Pinpoint when certain actions are needed (some of which can be automated).
• Provide data on performance to help with decision-making and reporting.

On a deeper level, inventory management KPIs and metrics can show you when a major issue must be addressed. At times, you won’t spot these without the stats. There may be an issue or room for improvement if a particular metric is declining or inconsistent.

Improving and maintaining performance metrics is a top priority for inventory management professionals. 75% of supply chain managers have reported wanting to improve inventory management practices. Often, inventory management mistakes are caused by simple things. Supposedly, human error causes up to 46% of warehouse errors. You’ll also be able to spot trends about certain inventory that must be addressed.

Worryingly, as much as 43% of companies do not actively monitor their inventory. This can lead to all kinds of issues, as discussed in Chapter 7 on inventory tracking.

Top Inventory Management KPIs and Metrics

Before we dig into this list, it is important to note that you will uncover more KPIs as you work on your company’s operations. Not all KPIs will be ideal for your business, workload, and warehouse, and you may come across new ones and drop old ones that aren’t helping your operations.

This is because not all businesses are the same. However, the following are the ones you’ll want to watch. To learn more about KPIs beyond inventory management, check out this blog post.

Without further ado, here are some of the most vital KPIs and metrics for inventory management.

What Is the Reorder Point (ROP)?

The reorder point KPI is the inventory level at which a new order must be placed to ensure there is enough inventory to meet demand until new orders arrive. It can’t be calculated without historical data, like many of the KPIs in this chapter.

How Is Reorder Point (ROP) Useful for Inventory Management?

The reorder point is extremely helpful for those working in inventory management. It helps keep your inventory in balance by streamlining the flow of inventory into the warehouse. Having reorder points defined allows you to reorder inventory only when a certain threshold is met.

You can avoid realizing too late that stock levels are low and miss the right moment to order and risk running out of inventory, or the opposite, end up with too much inventory that you can’t store or sell.

Reorder points can also be automated so new inventory is ordered as soon as the predefined reorder point is reached, sending a notification to warehouse professionals that they need to reorder.

How to Calculate Reorder Point (ROP)?

To calculate your reorder point, you need to know your approximate daily demand and lead time in days and how much safety stock you have. Here’s how to calculate your reorder point.

Reorder Point = (daily demand x lead time in days) + safety stock.

Take your daily demand, multiply it by your lead time in days, and then add your safety stock.

What Is the Minimum Order Quantity (MOQ)?

Minimum order quantity is a KPI for the smallest quantity of inventory that can be ordered from a supplier, according to your company’s cost considerations or based on your supplier’s requirements.

How Is Minimum Order Quantity (MOQ) Useful for Inventory Management?

Minimum order quantity is very useful for several reasons, most of which are related to lowering the costs of procuring inventory from suppliers. Firstly, ordering larger quantities typically results in lower unit costs. For suppliers, it’s better to send large shipments than many smaller shipments as they have a higher gross value per shipment, which means they spend less on shipping per product, which is better for their margins.

Furthermore, you will order less frequently from your suppliers, saving you and your supplier time and money, which is also good for your business’s relationship with your suppliers. Lastly, some companies use MOQ to take advantage of quantity discounts suppliers offer when ordering, which is important for your company’s bottom line.

How to Calculate Minimum Order Quantity (MOQ)?

To calculate the minimum order quantity (MOQ), you typically need to consider two main cost components—ordering costs and carrying costs. These costs vary from one business to another, so how you calculate minimum order quantity may differ from other companies.

Furthermore, a higher MOQ usually means lower costs, while a lower MOQ usually means higher costs. One way to figure out your minimum order quantity is through another metric called ‘Economic Order Quantity (EOQ).’ Here’s how you calculate EOQ.

Economic Order Quantity = √((2 * annual demand * ordering cost per order) / Holding cost per unit per year).

What Is the Maximum Order Quantity (MAX)?

Maximum Order Quantity is a KPI for the largest amount of inventory that can be ordered from a supplier and it is often used to limit the amount of inventory held to reduce carrying costs. Think of maximum and minimum order quantities as the limits of what you can order. They keep your inventory levels balanced.

How Is Maximum Order Quantity (MAX) Useful for Inventory Management?

You don’t want to order more stock than you can keep in your inventory, or you’ll have excess inventory that needs to be dealt with (perhaps sold onwards at a loss). If you’re in desperate need of stock and demand is estimated to be high, you’ll want to check your maximum order quantity so you don’t overdo it.

How to Calculate Maximum Order Quantity (MAX)?

There is no special formula to calculate the maximum order quantity. It is based on your storage constraints, specifically the space you have reserved for a specific product.

Available space = total space – occupied space.

What Is Lead Time?

Lead time is a metric used to calculate the time it takes for inventory to be delivered after an order is placed. It includes all the inventory management tasks and fulfillment tasks.

How Is Lead Time Useful for Inventory Management?

Lead time is most useful to inventory management to calculate other KPIs—it helps inventory managers figure out their inventory turnover (the rate at which inventory arrives and exits the warehouse). Lead time can also be used to figure out how time in the warehouse impacts how long it takes for a delivery to reach the customer.

You may need to change your inventory management practices to speed up lead time if it is too slow.

How to Calculate Lead Time?

Lead time is typically measured in days, and you can do it by subtracting the order request date from the order delivery date.

Lead time = order delivery date – order request date.

What Is a Service Level?

Service level is a KPI that indicates the percentage of orders that can be fulfilled immediately from available inventory without experiencing a stockout (when you run out of stock).

How Is Service Level Useful for Inventory Management?

Service level is useful because it helps inventory management professionals calculate how much inventory they need to order based on demand. It helps ensure there’s enough inventory to meet orders without ordering too much inventory. Service level can also be used to measure the performance of your inventory policies.

How to Calculate Service Level?

Service level is calculated as a percentage. To calculate the service level, you need to know the number of orders filled correctly and the total number of orders. You divide the number of orders filled correctly by the total number of orders and multiply that number by 100 to get the service level percentage.

Service Level (%) = (number of orders filled correctly / total number of orders) x 100.

What Is Cycle Count?

Cycle counting is a metric used to periodically ensure that records are correct in your system by doing a physical count.

How Is Cycle Count Useful for Inventory Management?

Cycle count is useful because if there is a discrepancy between what is recorded and what you physically store in your inventory, you can investigate it.

How to Calculate Cycle Count?

Cycle count = physical inventory – recorded inventory.

It is advised that cycle counts are done in subsets of your inventory instead of counting everything in your warehouse, which would be a monumental task and get in the way of other operations.

Key Points From Chapter 9

Remember these key points from Chapter 9 of our inventory management guide.

• The difference between KPIs and metrics is that KPIs measure your work towards a set goal.
• Not all KPIs and metrics you will come across will be useful to your company. It depends on your business and operations.
• The KPIs and metrics you rely on will change over time as you learn what is most useful and your business matures.
• Some of the most important inventory management KPIs and metrics you should monitor are reorder point, minimum and maximum order quantity, lead time, service level, and cycle count.