By setting key performance indicators (KPIs) to monitor inventory management, businesses are empowered to make better strategic decisions. Tracking the right metrics enables companies to improve cash flow, reduce operating costs and offer an exceptional customer experience.

But let’s face it: If you’re new to measuring inventory performance, the task of selecting which metrics to focus on can be a bit daunting.

The metrics you choose to track will depend on the kind of business you run and the growth you’re looking to achieve. A great place to start is by identifying your key business functions and recognizing how each one brings value to customers.

What to consider when selecting inventory metrics

Before you determine the KPIs you want to measure, remember that your selection will have a significant impact on your operations. Here are some important considerations to keep in mind.

• Consider your teams and use cases: Using the right inventory metrics can affect how everyone does their job. So, be sure to choose metrics that will provide the right data for your teams’ unique use cases. At the same time, seek to use KPIs across departments to foster collaboration and track common company goals. That way, everyone will have what they need for their respective jobs while still working towards the same goals.
• Choose KPIs based on value, not effort: While capturing metrics around existing efficiencies may be easier, it’s important to gather metrics that reflect increases in effectiveness. Even if they prove more challenging to track, these metrics genuinely add value to your business, as they indicate improvements in your operations and strategic decision-making.
• Make your KPIs SMART: Don’t settle for metrics that are too broad in scope because they won’t give you actionable insights. Your KPIs should be Specific, Measurable, Achievable, Relevant and Timely.
• Beware of vanity metrics: While making a specific department or process appear high-performing, these metrics don’t deliver valuable insights into the effectiveness of your inventory management performance.
• Use the right tools: To manage your metrics effectively, select inventory software with a user-friendly and customizable dashboard. Track and communicate your metrics regularly across the business.

Here are some key inventory management metrics to have on your radar:

1. Demand forecast accuracy

Understanding how your demand forecasts perform against actual demand is essential for closing any gaps. This metric also relates to inventory carrying costs, a key element of inventory management effectiveness. Accurate demand forecasting means you’re less likely to order excess inventory. Increased accuracy will also enable you to respond quickly when it’s necessary to order more stock than usual—and, in the process, grow your business.

2. Perfect order performance

This metric indicates how effectively you deliver customers complete, accurate and damage-free orders. Factors making up a “perfect order” include:

• The % of orders delivered on time
• The % of complete orders
• The % of damage-free orders
• The % of orders with accurate documentation

Most suppliers achieve a perfect order performance of 90% or higher. With ever-improving manufacturing intelligence, however, perfect order performance is likely to increase further across all production strategies.

3. Customer satisfaction

This metric is often measured in terms of net promoter scores or NPS. Customer satisfaction levels should be evaluated across all channels, and an NPS score should be determined for each separately. This enables companies to check and index customer order-to-delivery times to see if they’re as they should be. There’s a big difference between customer service that’s merely good and offering world-class service to customers.

4. Inventory turnover

This metric measures the number of times inventory is sold and replaced (i.e., “turned over”) in a specific time period. It’s a good measure of overall business efficiency; higher turnover generally means greater efficiency.

However, this doesn’t mean that having a slower turnover is always an indicator of inefficiency. If you sell higher-priced items, they may spend more time on the shelf but still make good profits for your business.

The two approaches generally used for calculating inventory turnover are:

• Sales by average inventory over a specific period
• Cost of goods sold (COGS) divided by average inventory over a specific time period

For a more in-depth discussion on inventory turnover, as well as an easy-to-use calculator tool, visit our resource here.

How to interpret inventory turnover metrics

A company with excessive inventory compared to sales can indicate unexpectedly low sales or poor inventory planning. For example, an excess of stock may be built up in anticipation of seasonal selling, or some may be out-of-date. Also, a business’s accounting method can affect how much inventory is reported, skewing results.

When a company sees a low inventory turnover rate, it may indicate that it has a flawed purchasing system and has bought too many goods. It could also mean that stock has been purchased in anticipation of sales that didn’t materialize due to a shift in demand. A high rate of inventory turnover implies that the purchasing function is operating well. However, this could indicate another possibility: the company doesn’t have sufficient cash reserves to maintain normal inventory levels.

5. Out-of-stock rate

“Stock-outs” relate to the frequency of inventory requests without stock availability. This can impact the supply chain and be frustrating for customers who wait until a company restocks their requested items. As such, it can have a big impact on customer loyalty. Causes of out-of-stocks include poor inventory management, machine breakdowns or a break in the replenishment order process.

Calculate the out-of-stock rate by measuring the amount of stock that cannot be supplied based on daily, weekly, monthly or annual sales volume. For example, if 400 customer orders were not fulfilled out of 1000 orders for the month due to no available stock, the percentage would be 40%. If your numbers are anywhere near as high as this, you will inevitably be experiencing large volumes of dissatisfied customers.

6. Order cycle time

Order cycle time (OCT) tracks how quickly you fulfill orders. Sometimes referred to as “lead time,” this metric reflects how well your supply chain, production and fulfillment processes work together. Companies with shorter OCTs are responding better to customer orders, while those with longer lead times may be experiencing customer dissatisfaction and becoming competitively disadvantaged. The more efficient your processes are, the better your OCT will be.

7. Inventory carrying costs

These include the many overhead costs (often hidden) of stocking items in a warehouse. They include:

• Capital costs—the costs related to investment in buying stock, interest on working capital and opportunity cost of invested money
• Service costs—including insurance, IT hardware, security and the expense involved in handling goods in a warehouse
• Storage space—these costs include rent of the warehouse, any mortgages on the property and maintenance costs, including heating,lighting or air conditioning
• Risk costs—related to the costs of covering items that become obsolete, shrink or lose value while stored

Inventory carrying costs are calculated by totaling the overhead costs and dividing this by the average annual inventory cost. This gives you a percentage, usually ranging from 15 to 20%.

Implementing more efficient warehouse and inventory management processes will improve your carrying cost KPIs.

Getting started

Don’t be intimidated by the list of metrics! Start with inventory turnover, which is relatively easy to track, to gauge your overall inventory health. Add relevant metrics over time to identify improvement opportunities. You can also begin to implement reliable inventory management software to ensure accurate data collection and simplified tracking.

SPS Analytics solutions give you insights to track inventory performance and make key decisions to maximize spending value and avoid waste. Our inventory management services solve all your inventory challenges—helping you gain the data you need to make your KPIs accurate and your goals achievable.

Sell-through rate is an essential piece of the supply chain puzzle. Understanding this metric isn’t just about crunching numbers; it’s about wielding a powerful tool to elevate your inventory management process and improve your overall business success. If your shelves are brimming with product, but you lack a clear picture of how quickly that product is flying off those shelves, you’re navigating blindfolded through the retail landscape. Let’s take a closer look at how mastering this metric can unlock a world of efficiency, profitability, and strategic growth.

What is sell-through rate?

Sell-through rate is the percentage of inventory sold during a specific time measured against the amount of stock received from manufacturers or suppliers in the same period.

For example, a sell-through rate of 10 percent indicates that only a small percentage of the stock is sold. In this case, the stock isn’t moving fast enough to turn a significant profit.

Industry-wide, the standard for a robust, lucrative sell-through rate is around 80 percent. The average is typically between 40 and 80 percent. Sell-through rate is a key performance indicator of the strength of a company’s inventory management, and therefore, its profitability.

That’s why it is crucial to understand how to maintain a consistently high sell-through rate.

How to calculate sell-through rate

A solid understanding of a product’s sell-through rate allows businesses to accurately predict how much stock they need and adjust supply accordingly.

Use this simple formula:

Sell-through rate = (number of units sold/number of units received) x 100

To calculate sell-through rate for a specific period:

1. Determine the total number of units sold in the given period.
2. Determine the number of units received in the same period.
3. Divide the number of units sold by the number of units received.
4. Multiply the figure by 100 to get a percentage.

The sell-through rate reveals key areas to focus on, such as which product quantities need to be increased or decreased based on sales data. This figure also suggests how to achieve a more efficient sales and inventory balance to increase profit and minimize waste.

 

Looking for sell-through data for a specific retailer? Get full visibility into your sell-through performance with SPS Analytics. 

 

What is a good sell-through rate?

Sell-through rates tell you a lot about a company’s success.

Most experts consider a stellar sell-through rate to be anything higher than 80 percent. A high sell-through rate demonstrates that the company has accurately predicted demand.

On the other hand, low sell-through rates may indicate that too much inventory was ordered or that the wrong product was offered to consumers. This suggests the business either lacked the retail data needed or interpreted that data inaccurately, resulting in a poor forecast. These mistakes come with costly effects, such as having cash tied up in goods, needing to make line plan contingencies or markdown plans and paying more for storage to hold excess inventory.

What about a sell-through rate of close to 100 %? While more desirable than having a low rate, this means the business may not be taking advantage of market potential. In this case, there may be a surplus of demand that the existing inventory isn’t meeting, and they are losing potential sales for both themselves and their retailers.

How to increase sell-through rate

There are many reasons a company might experience poor sell-through rates or dramatic month-to-month dips in sales performance. Improper demand planning, a lack of customer and regional understanding, and the absence of real-time data tracking all contribute to underperformance.

To bolster sell-through rates, businesses need to focus on the following strategies.

Tap into the power of data

A recent survey of 150 suppliers found that 75% of respondents considered gaining insight into retailer sales and inventory data would be impactful to their organizations.

To maximize sell-through rates, businesses must first identify the factors contributing to poor sell-through and tackle them individually. This means measuring these factors regularly and making adjustments in real time.

• Track sell-through rate monthly to spot inconsistencies and trends throughout the year.
• Focus on seasonal periods and historical trends to spot inventory that can be adjusted year-round. This may mean increasing or decreasing order volumes.
• Get more granular with data. For example, break down monthly sell-through rates into weekly data. This also allows businesses to react quickly to real-time trends, increase efficiency and limit waste.
• Track sell-through rates before, during and after promotions. This data provides valuable insights into adjustments that may improve performance.
• Harness retail data to foster better collaboration between retailers and suppliers.

Get creative with merchandising

Creative merchandising is also helpful in boosting sell-through rates on underselling products. For businesses that focus on high-value items, upselling to new customers and cross-selling to returning customers can lead to higher sell-through rates.

For example, in brick-and-mortar stores, the psychology of store layouts can be the difference between an impressive sell-through rate and excess inventory. So, using data to recommend efficient floor plans and visual merchandising can make all the difference in sales performance. This means using seasonal trends and buying habits to optimize store layouts and promotional strategies.

Run promotions

If sales are stagnant and stock isn’t moving as quickly as it’s coming in, implementing offers or promotions may move the dial. For example, retailers may use some of the following strategies to incentivize sales:

• Bundle slow-moving products with popular sellers at a slightly marked-up price.
• Include low-value, high-volume stock as free add-ons as part of a promotion.
• Amend the price point for products with clear promotions.
• Run wide-scale sales to promote marked-down products.

Sell-through vs sell-out

Many supply chain terms have similar meanings but may refer to different stages of a product journey.

Sell-in refers specifically to the sales from suppliers to retailers, while sell-out refers to the sale by retailers to end consumers. The term sell-through, however, refers to the whole process: the journey of products from suppliers to retailers and eventually to consumers.

Sell-through and sell-out aren’t mutually exclusive, and sell-out is critical in defining a retailer’s sell-through rate.

To learn more about improving sell-through, check out our best practices to drive sell-through or contact us for a personal consultation.