Keeping inventories at the exact desired level is not an easy task. It requires coordination between purchasing, sales, forecasting and demand planning. Very high inventories guarantee demand satisfaction but incur high costs. Low inventories ensure low maintenance costs but involves the risk of losing sales, which represent a very high intangible cost.
Let’s look at some performance indicators for inventory management:
Inventory accuracy: you must have reliable and accurate data on the volume of inventory held. Thus, this indicator measures the difference between the physical inventory (the one that is actually stored) and the accounting information of the inventories. It is calculated as the ratio of the physical inventory and the information in the system. The closer to 100% the better, and if it is below 99% you should pay attention.
Stock outs or lack of inventory: as highlighted, the lack of inventory entails a cost normally impossible to calculate accurately. In addition to unrealized profit from the sale, what else can the company have lost? Other sales, image, or even the loss of a customer. How to calculate these components? Before that happens, it’s best to avoid losing a sale. This indicator can measure the number of sales lost due to lack of inventory or the size of lost sales. It should be adapted to each situation.
Percentage of inventory not available for sale: if the inventory was poorly accommodated and stored, it will suffer malfunctions/breaks. If warehouse management is not efficient, some products may perish. For various reasons, some products become unavailable for sales, and we do not want this to happen. This indicator measures the percentage of items in inventory that are unavailable for sales. It can be calculated as the cost of unavailable inventory on the cost of total inventories.
Percentage of capacity utilization: this indicator measures whether the space allocated to inventories is too small or too large. In either case, the situation is undesirable. It should be calculated as the volume (in m³, or by the number of positions) used by the inventories divided by the capacity of the warehouse (also in m³ or in available positions). If it is too low, the space is too large and could be better used by other areas of the company. If it is above 100%, it means that there are stocks in areas where they should not exist, such as moving spaces or even corridors.
Average inventory level: this indicator evaluates how many days of sale are stocked in inventories. In other words, for how many days can the company operate with the current inventory? It is measured by dividing the quantity of items in inventory by the average daily demand. The lower, the closer a lean system is being used. Very high values for this indicator are usually undesirable.
These are just a few examples of key performance indicators for inventory management. They should be adjusted to measure processes and areas relevant to each company. Check out other examples of indicators here on EasyLogistics.site.