Inventory. It isn’t the most interesting part in the e-commerce space. But, let’s face it – brands would be nowhere without their inventory! Not only is inventory made up of products that your customers want, but it’s also a key indicator of whether or not your brand is “healthy.”
Think of it this way: too much inventory and too little sales = an unhealthy business. Alternatively, too little stock and too many sales? Another red flag.
No matter how you slice it, inventory plays a huge role within a direct-to-consumer business. It tells a story of what strategies are working for e-commerce fulfillment, how your customers are enjoying your products and processes, as well as how your inventory impacts your overall financials.
In this blog, we’re going to cover the inventory management KPIs your brand should be paying attention to in order to keep track of your total inventory value and inventory movement over time. Let’s begin!
Key performance indicators (KPIs) are quantifiable metrics used to determine whether your company is headed in the right direction for a previously established business growth goal. In tracking KPIs, an e-commerce brand can quickly understand if there’s any room for improvement.
While KPIs are sometimes confused with metrics, they’re two very different things. Metrics record the performance of specific business activities. They are operational and usually don’t stand strong when they are referenced alone. Whereas KPIs are less operational and more strategic.
Typically, key performance indicators are made up of a set of various metrics to understand an overarching business goal. For example, a customer satisfaction score requires the division of two different metrics from a customer survey: the number of positive responses versus the number of negative responses.
In today’s volatile economy, brands are having more and more difficulty knowing what they’re going to get. Will supply chain woes delay their inventory arrival? Will customers continue to shop online during difficult financial times? Will a social media post go viral and boost sales in a matter of minutes?
Inventory KPIs might not be able to tell the future; however, they can paint a good picture of your current operation and inventory risk costs while helping your business forecast demand and make informed decisions about storage costs, unsold inventory, and your inventory management system, just to name a few. (Decisions that could potentially save your company plenty of money in the long run!)
In sum, inventory management KPIs allows businesses to:
Ultimately, it’s up to each business to decide which KPIs and metrics they want to track for effective inventory management. It boils down to understanding what your most important business goals are, and which inventory metrics and KPIs will help you get closer to each goal.
If your brand is just beginning to dive into inventory management, the number of metrics available to track can feel daunting. Start with establishing your strategic goals and work your way down from there. Additionally, don’t forget to be specific. Instead of saying you’d like to “decrease inventory shrinkage,” try setting a specific goal over a period of time like “decrease inventory shrinkage by 3% over 12 months.”
Inventory accuracy measures your actual inventory on hand compared to the records you have. And in inventory management, it’s the golden KPI. Why? Understanding inventory accuracy and keeping a healthy score prevents brands from losing money and helps them boost customer satisfaction.
An accurate depiction of your inventory allows your company to relay the correct “in stock” number of units to your customers so there aren’t any surprises. Plus, it allows you to order the correct amount of product to your warehouse, avoiding a bloated inventory and a high inventory carrying cost.
To get your inventory accuracy rate, you’ll need to divide your manually counted units by the number of units on record and multiply this number by 100. For example, if a brand counts 600 units on-hand, but their WMS shows 800 units available to pick, their inventory accuracy would be 75%.
Also known as inventory turn or inventory turnover, this KPI measures the number of times a company sells and replaces stock over the course of a specific time period (typically a year). It’s vital information to have in e-commerce because it gives brands insight into how much stock is needed based on sales. A low inventory turnover could point to potential problems in sales or marketing – that your products aren’t getting enough traction and you have too much stock leftover.
Inventory Turnover = Cost of Goods Sold/Average Inventory
To calculate your inventory turnover, you’ll need to understand your average inventory. Average inventory can be calculated by adding your inventory count at the beginning of a specific period plus your inventory count at the end of that period and dividing by 2. Once you have your average inventory, you can calculate your inventory turnover rate by dividing your cost of goods by your average inventory.
A high inventory shrinkage rate isn’t a good thing. It means that your actual inventory levels are consistently different from what your company has recorded. This could be due to products getting damaged within shipping (and deemed unusable), human counting errors, or even theft.
To calculate your inventory shrinkage rate, simply subtract your actual inventory from your recorded inventory and divide it by your recorded inventory. For example, if a brand has its inventory recorded at 20,000 units but its actual inventory on hand only amounts to 19,560 units, its inventory shrinkage would be 2.2%.
While it may not seem like that big of a deal, repeated loss of inventory is essentially the same as throwing money down the drain. Your brand is already using time, energy, and funds to bring products into the warehouse – if there are units lost or damaged, that diminishes opportunities to sell and contribute to your bottom line.
Ah, shipping time. It might not seem like an inventory KPI, but it actually has quite a bit to do with processes around inventory management.
“Time to ship” tracks the length of time it takes a product to ship once customer orders are placed. In e-commerce where customers expect 2-day shipping as the unwritten standard, this KPI couldn’t be more important. If there are delays to the order fulfillment process, this can result in orders being dispatched late.
Dock to stock (DTS) is an invaluable inventory management KPI because it tracks how long it takes your inventory to reach shelves, racks, or bins, ready to ship to the end consumer. If your DTS time is too long, your entire operation could suffer.
Dock to stock begins with inventory making its way from a supplier to the warehouse loading dock and ends once that inventory is safely stored within the warehouse. If the inventory takes far too long to get stored, customers could feel the effects of longer wait times for restocked items.
Lead time goes one step further than “time to ship” by calculating how long it takes for a customer to actually receive a package from the time they placed an order. One of the more operationally-focused inventory KPIs, brands can calculate lead time to put a value on their overall supply chain process and inventory management performance.
In e-commerce, the goal is to build an army of brand advocates who purchase your products again and again. This means that everything needs to be on point, especially your lead time. The higher the lead time, the more likely you may find yourself with some frustrated customers.
Dead stock refers to inventory that has reached the end of its lifecycle, with little or no chance of selling in the future. Seasonal items like outerwear or swimwear have a high potential to become dead stock if they aren’t sold during their respective season – consumers are much less likely to buy these items in the future if they are following last year’s trend.
Dead stock is a very useful inventory KPI because it sheds light on items with a low inventory value that may be racking up warehousing and carrying costs with no end in sight. With a few proactive inventory management strategies such as SKU rationalizing, brands can keep their dead stock in check and lessen their overall inventory carrying costs.
In inventory management, return rate is an especially telling key performance indicator. E-commerce return rates are calculated by understanding the total number of products sold vs. the total number of products returned in a specific period.
Return rate = # of units returned divided by # of units sold X 100
If your return rates are high, it could mean something is off with your choice of inventory. Your brand will likely need to dig into the data to understand customer return behavior and avoid a high return rate. Something as simple as a misrepresented color within a product image or an inaccurate sizing guide could cause a spike in return rate.
Cost per unit calculates the amount of money it takes to supply one unit of inventory. Not only does it allow your brand insight into how much you’re actually spending on your inventory, it also helps determine the amount of revenue you’ll need to bring in in order to remain profitable.
To calculate your cost per unit, you’ll need to know your fixed costs and your variable costs. In inventory management, your fixed costs refer to any charges throughout the month that remain the same (employee pay checks, warehousing costs, etc.). Variable costs include any prices associated with the amount of product ordered and the cost of getting physical inventory into the warehouse.
Once you know your fixed and variable costs over a specific period, you can add these two metrics together and divide the sum by the total number of units to get your cost per unit.
Days on hand (DOH) is an extremely useful inventory KPI – it tracks the number of days it takes a company to sell its products. Also known as days of sales inventory (DIS) or days of outstanding inventory (DOI), this metric is a good one to keep an eye out for demand forecasting and inefficiencies within your operation. If your DOH is consistently high, you could be holding onto excess inventory, which actually costs your brand more in the long run. This inventory metric can also be expressed as weeks on hand (WOH).
The goal should always be for a lower number of days on hand – the lower the number the more your products are moving in and out of the warehouse and into happy customers’ hands.
At first glance, it may not seem like customer satisfaction falls into inventory management. But, the reality is, understanding your customer satisfaction is very vital to inventory. It helps determine whether your customers are having positive experiences with not only your product but your order process as well.
Brands can check customer satisfaction scores, or CSAT, at any touchpoint of the customer journey. For example, they can send a quick survey after an order has been delivered asking how satisfied the customer is on a scale of 1-10 with shipping time or product.
Unfortunately, there isn’t a golden list of KPIs that lead to perfect inventory management. Brands who want to up their inventory management process will need to take a long, hard look at their operation and decide which KPIs matter the most to their unique business.
Tracking inventory means you’ll need… well… something to track. Make sure every single piece of inventory in your operation has a stock-keeping unit (SKU). Quickly defined, a SKU uses a unique barcode to track variations of an item like size, color, model, and material. Learn more about SKUs.
Why SKUs? SKUs help merchants track their inventory and allow for seamless insight into current and previous records of stock. The results? Demand forecast accuracy and the ability to value your best-performing SKUs.
Investing in an inventory management solution is the key to increased inventory value. Technology that integrates directly with e-commerce platforms and the warehouse allows for real-time inventory management metrics that can guide a brand to lower costs and a more efficient inventory strategy.
Partnering with a 3PL who has inventory management abilities helps increase inventory visibility from start to finish. Plus, 3PLs give brands access to expertise in reducing inventory costs and managing operational inventory KPIs.
With Ryder E-commerce by Whiplash’s proprietary technology platform, Whiplash, brands have access to advanced automation and inventory tracking from one convenient, real-time dashboard.
What can brands do with the Whiplash technology?
No matter the brand, understanding inventory and determining inventory management KPIs opens the door to cost-effective, seamless e-commerce growth. Interested in learning more? Check out how Ryder E-commerce by Whiplash can assist your brand with inventory management and e-commerce fulfillment.