A few months back, we did our friends over at ShipBob a solid and broke down the inventory management KPIs that every retail brand needs to track.
In honor of our new integration with them, we are expanding on that because we realized that tracking those KPIs doesn’t do your business much good if you don’t, improve those numbers.
So, we’re revisiting those 15 most valuable inventory KPIs and diving deeper into how you can boost each one.
Key performance indicators (KPIs) are quantifiable inventory analytics companies use to gauge progress toward a specific goal.
Ecommerce businesses use inventory management KPIs to gain insight into costs, turnover, customer demand, revenue, process, and supply chain efficiency. Tracking and improving inventory KPIs enables brands to boost efficiency, maximize cash flow, and increase profitability.
You can’t improve the inventory management KPIs you don’t track.
Well, maybe you can accidentally. But, long term, this laissez-faire strategy won’t be replicable (allowing you to do it repeatedly) or scalable (enabling you to grow).
So, which inventory KPIs should you track and intentionally improve? In collaboration with ShipBob, we identified 15 inventory management KPIs that every retail brand needs to keep a pulse on:
|Inventory KPIs||What this tracks||How to track|
|Inventory holding costs||How much it costs to store and protect unsold inventory||Inventory Holding Cost = (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory|
|Stockouts||Which product offerings are currently unavailable||Using an inventory management system (IMS), any SKU you have zero of|
|Lead time||How long it takes to receive orders from your manufacturer||Lead Time = PO Processing Time + Production Time + PO Fulfillment Time + Supply Chain Delays|
|Inventory accuracy||If your inventory records match your actual inventory levels||Compare physical inventory counts with records of inventory on hand, which is known as “inventory reconciliation”|
|Inventory days on hand||How quickly a business uses up its inventory levels on average||Inventory Days On Hand = (Average Inventory For The Year / Cost Of Goods Sold) x 365|
|Safety stock||How much excess product brands should keep on hand in case of supply chain issues||Safety Stock Needed= (Maximum Daily Usage x Maximum Lead Time) – (Average Daily Usage x Average Lead Time)|
|Stock availability||How much inventory is currently in stock to sell||Using an inventory management system (IMS)|
|Inventory shrinkage||If your inventory records match your actual inventory levels||Inventory Shrinkage Rate = (Recorded Inventory – Actual Inventory) / Recorded Inventory|
|Dead stock||Which SKUs aren’t selling despite being in-stock||Using an inventory management system IMS, any SKU that is not selling|
|Inventory turnover rate||If a brand has too much inventory for the demand||Inventory Turnover Rate = Cost Of Goods Sold / Average Inventory Value = Number Of Units Sold / Average Number Of Units On Hand|
|Backorder rate||The number of orders a brand can’t fulfill when a customer tries purchasing it||Backorder Rate = Delayed Orders / Total Orders Placed|
|Revenue per unit||How much you’ll make on average by selling one unit of product||Average Revenue Per Unit = Total Revenue / Total Units Sold|
|Cost per unit||How much one unit of inventory costs to manufacture or supply||Cost Per Unit = (Fixed Costs + Variable Costs) / Units Produced|
|Stock to sales ratio||How healthy your inventory levels are||Stock To Sale Ratio = Average Inventory Value / Average Sales Value|
|Order cycle time||The average order fulfillment time||Average Order Cycle Time = (Delivery Date – Order Date) / Total Orders Shipped|
|We go into more detail on how to track each of these KPIs in our original post, published on ShipBob’s blog.|
Improving your inventory management KPIs isn’t a one-size-fits-all approach. It depends on which metric you’re trying to move. So, looking at the above list, let’s break down actionable ways you can improve each one.
Inventory holding costs are directly tied to your stock levels. So, to keep inventory holding costs down also means maintaining optimal stock levels.
Ideally, this means only keeping stock on hand that will actually sell in the next 90 days or so. Then, whenever you’re running low, receive the next replenishment just in time to avoid a stockout.
But this perfect scenario doesn’t always work in practice–not with unreliable supply chains or shifting consumer demands.
And when things go wrong, most brands react by ordering too much (and usually placing orders too late). This makes a stockout all but inevitable. Not to mention it drives up inventory holding costs when the order finally arrives.
If you want to lower inventory holding costs, a better strategy is to build a 12-month operational plan (which Cogsy can help with). With this plan, you can proactively work with your manufacturer to ensure they can fulfill your future purchase orders (POs).
Plus, you can use this plan to negotiate terms with your manufacturer that allow you to place smaller POs more often. This ensures that you’ll always have the product you need without needing to order a ton upfront and tie up working capital.
However, the danger of forecasting 12 months out is that things can change fast. So, how can you ensure that your plan doesn’t leave you heading in the wrong direction? You track how you’re measuring up to the original plan (Cogsy can do this too)!
This way, you can understand and visualize what’s happening and take immediate action. For example, say you see an unexpected jump in sales this week. It likely won’t throw off your entire operational plan, but it could have a butterfly effect six months down the line that puts you at risk of a stockout.
But knowing that this happened in real-time allows you to communicate to your manufacturer that you’ll need to increase an upcoming purchase order. That way, they can ramp up production to fulfill a bigger purchase order or fulfill the next PO sooner than scheduled.
That moment when customers are on your product page with their credit cards out? There won’t be a better moment to close the sale. But a stockout can quickly ruin that.
When you’re out of stock on a product, roughly 21-41% of customers will purchase a similar offering from your competitor. And many of those that don’t buy elsewhere will lose interest before the product comes back in stock.
So, the best solution is to avoid stockouts and lost sales in the first place. And that same 12-month operational plan that keeps inventory holding costs down also prevents stockouts by ensuring you have enough product available.
But say things go really wrong, and you see that a stockout is inevitable.
This might sound counterintuitive, but try accelerating it. Meaning, call out that you only have a “few left in stock” on the product page to create scarcity. Top brands like Amazon, Hotels.com, and Lulu’s do this to entice customers who might otherwise wait to complete the purchase.
You can create even more urgency by noting how long the customer will have to wait if they don’t buy before you go out of stock. For example, “buy now and get in two days; next available ships in 4-6 weeks” can really put pressure on customers to buy.
However, you only want to accelerate the inevitable if you have strategies to offset the stockout.
Historically, brands would just watch their conversion rates crash to zero when they went out of stock. Then, they started sending back-in-stock notifications, but those don’t perform much better (they only work 5-15% of the time).
Neither of these strategies is proactive enough to recoup revenue lost to stockouts.
Brands that sell in backorder see a marginal drop in conversion rates compared to when the product is in stock.
But some people can’t afford to wait for the product to come back in stock. When this is the case, it’s best to recommend similar or related products that the customer might be interested in.
McKinsey reports that roughly 35% of Amazon’s sales come from recommending other products, making it a highly effective strategy.
But this strategy might not work if the product is intended as a gift. When this is the case, you can use a tool like Govalo to drive the sale instead.
Govalo offers customized gift cards on sold-out product pages that customers can send directly to their intended recipient. (For context, Shopify makes you send gift cards to your email, then forward it to the recipient.)
For one, offering gift cards in place of sold-out products leads to a better customer experience for everyone involved:
Plus, the end recipient will spend $59 more than their gift card value on average. Meaning, you’ll also generate more revenue than if you sold the initial product as a gift.
|🤿 Dive deeper: How to build a gift carding strategy with Govalo.|
Shortening your lead times starts by working with the right supply chain partners—especially at the manufacturer and supplier levels.
For example, using a local supplier, working directly with the source manufacturer, or consolidating vendors will all cut down the time it takes to receive purchase orders.
And the longer you work with these partners, the more leverage you’ll have when asking for “uncommon” arrangements or terms. But for newer partnerships, you can earn this leverage by guaranteeing your business to some extent.
Like your brand, it’s cheaper for your manufacturers and vendors to retain you as a customer than to acquire a new one. So, the reliability of your business becomes currency in the negotiation.
To do this, share your 12-month operational plan with your manufacturer. Then, commit to fulfilling a minimum number of those POs with them. You can even outline the rough timeline for when you’ll place these orders for some additional insurance.
This long-term commitment can then make short-term, smaller inconveniences on the manufacturer’s side tolerable.
For example, you could reasonably ask the manufacturer to prioritize your purchase orders without additional expediting fees. This way, you’re not waiting days or weeks for the manufacturer to even start processing the PO on their end.
Or, a bit more unconventional, you could ask your manufacturer to always hold extra safety stock for you (for example, 5% of your average purchase order). And that they ship out that safety stock as soon as the PO is placed.
That way, even if your average order lead time is 90 days, you could have the first 5% in as little as 30 days. And this small replenishment can buffer your brand from stockouts while your manufacturer works on fulfilling the rest of the order.
Most of the time, when inventory accuracy is off, it’s because of inventory shrinkage. And unfortunately, you won’t know that your inventory shrunk until you take stock.
Sure, there are technologies available that can hypothetically help you spend less time taking stock, like garment trackers. But robots can’t actually count the number of items you have on hand at a given moment.
So, to ensure accuracy, you need to be disciplined enough to routinely take stock the old-fashioned way. That means having two separate people count how much of each SKU you have on hand. Then comparing the results.
If the two counters don’t come up with the same number, they need to recount. And only once both parties agree on how much you actually have on hand can you compare it to how much you’re supposed to have on hand.
Admittedly, this task can be time-consuming and labor-intensive—especially if you have hundreds or thousands of units on hand. But by maintaining optimal stock levels, you’ll naturally keep your inventory levels as low as possible and lighten the task load.
Plus, if you can be disciplined enough to run these audits at least once a month, you’ll naturally see shrinkage decrease. That’s because internal theft accounts for over 40% of all inventory shrinkage.
But if you’re constantly tracking how much of each SKU you have available, you’ll discourage employees from thinking they’ll get away with stealing and reduce inventory risks.
In addition to taking stock, small business advisor Greg Crabtree suggests in his book, Simple Numbers, that retail brands also run weekly accounting exercises.
That’s because inventory inaccuracies and increased shrinkage decrease your gross profit margins. But if you’re like most retail brands, you’re taking care of your accounts on a monthly or quarterly cadence.
In other words, you’re tracking the numbers retroactively, and you’ll only learn that something went wrong after the fact.
But by monitoring gross margin percentage or gross profit percentage week over week, you could identify potential inventory problems, like shrinkage, before it becomes a serious problem.
Maintaining enough safety stock without increasing inventory days on hand goes back to maintaining optimal stock levels.
Ops optimization tools like Cogsy pull historical sales data when calculating your optimal stock levels (this number naturally includes the right amount of safety stock). Then, it monitors those stock levels in real-time to ensure they stay within that optimal threshold.
When it’s time to replenish, Cogsy will notify you and have an optimized PO ready for you to submit. This way, you effortlessly maintain optimal inventory levels and avoid a stockout.
For a human, this can be a tedious and labor-intensive responsibility. Not to mention, you’re typically working off spreadsheets with slightly outdated information. Meaning, you’re likely to act too late and make the wrong move.
Whereas, Cogsy can automate this task by keeping a 24/7 real-time eye on your inventory levels. This way, there are no surprises about how many items you have available.
Plus, it’ll identify early indicators of a potential butterfly effect in the works. And it will recognize these patterns weeks sooner than a human analyst could.
That’s because when something changes (like longer lead times or sudden spikes in demand), Cogsy forecasts our various scenarios from worst case to best case. Then, it tracks how your actual performance measures up.
“Cogsy is the hub and real-time source of truth for our operational data. We're now able to plan for each upcoming quarter with more clarity and accuracy.Greg Davidson, co-founder & CEO of Lalo
With these insights, you can understand the potential effect these recent changes will have on your long-term growth. And as soon as the tool identifies which scenario you’re operating within, it’ll let you know so you can proactively plan how to respond on time.
|👉 Don’t take our word for it – try Cogsy free.|
To calculate your true stock availability, you need to understand your seemingly hidden incoming or outcoming units.
Typically, these discrepancies don’t get calculated into stock availability because they’re not visible in your inventory management systems (IMS). And without a system to account for these units, you’ll likely end up overselling or overstocking.
For example, say you’re out of stock on your best-selling t-shirt today. But you have a purchase order with 1k of these t-shirts currently in transit.
When that order arrives, you’ll have 1k t-shirts you can sell, right? It depends.
Say your marketing team has already committed to a huge promotion where they’re giving away 500 units of this bestseller. And this promotion starts as soon as this replenishment arrives.
Then, those 500 units (called “outcoming units”) aren’t available for sale.
So, when you finally get your purchase order, you’ll only have 500 t-shirts available to sell, despite having 1k in the warehouse.
The trouble is when these marketing promotions happen, most ops teams don’t know they’re happening. And the brand oversells this t-shirt, leading to a lot of very frustrated customers as a result.
Luckily, Cogsy’s marketing event feature factors upcoming promotions and sales into your operational plans.
As a result, it seamlessly balances your marketing and operations team’s needs to ensure outcoming marketing units won’t impact your sales revenues.
On the flip side, your return process could be introducing a significant number of unaccounted incoming units.
Most return merchandise authorization (RMA) systems don’t automatically feed into your inventory management software. The idea was that most items aren’t returned in a condition where they can be resold.
However, that’s not true for all units, so what happens to the returns you can resell?
Typically, they’re put back on the floor as phantom inventory. Meaning they’re not accounted for in your stock levels. And if the return is a slow-moving product or there’s a ton of it, it could jack up your inventory holding costs.
For example, say people returned 5 units of that best-selling t-shirt this month.
If you’re a bigger brand that sells 1k+ units of that product every month, this discrepancy isn’t a huge deal. That’s because the difference is marginal, and the product will sell all the same.
But say you’re a smaller brand, or it’s a slow-moving SKU that you only sell 20 of in a month. Then, those units account for 20% of your recorded available stock.
Meaning, you’ll restock well before you have to and likely overstock because the ghost inventory isn’t documented in your IMS. And because you can’t assume this problem is contained to one SKU, you’ll see higher stock holding costs across the board as a result.
To avoid this, create a system where your RMA feeds data on returns into your IMS.
While this can be done manually, that leaves a lot of room for error. Instead, the best option is to automate the process through an integration compatible with both tools.
Generally speaking, a healthy business has 15% dead stock (or less) in its active inventory.
But for direct-to-consumer (DTC) brands, that number typically creeps up toward 33%. This ties up capital and radically drives up operational costs. And the best way to handle this dead stock is to get rid of it fast.
However, when does an SKU officially become dead stock? Unfortunately, there’s no hard-and-fast answer. Instead, it comes down to your best, most brutal judgment. Meaning if you think it’s dead stock, treat it like dead stock.
To inform this decision, look at three turnover rates in your inventory management system:
Say the SKU is moving slower than it historically has, but it is still turning over faster than most items. Then, it’s safe to say it’s not dead stock yet–just in a lull.
But if the SKU has stopped turning over almost entirely, then it’s dead stock, and you need to get rid of the remaining units. Yes, all of the remaining units–even if the product is seasonal and likely to come back in style the following year.
The only exception would be if the item is collectible and will appreciate enough value to cover the related holding costs. (Again, use your best, most brutal judgment.)
When you identify an SKU as dead stock, there are a few ways you can get rid of it.
For example, most brands will first try bundling the dead stock SKU with a complimentary best-selling product.
While you’re working through the remaining inventory, this strategy will hopefully increase your average order value (AOV) and cover some of the holding costs that the dead stock items accrued.
If bundling doesn’t work and you’re just looking to break even, put the item on clearance at the lowest possible price you can sell a product for. Similar to bundling, this price should ideally offset some of the related hidden costs.
But say you’re not worried about the short-term gain, or you already know you’re going to have to eat your margins. Then, give the dead stock away as a sample or gift as a branding play.
For example, the ready-to-drink chai brand Kimbala gifts non-expired dead stock to community partners, customers, and their team. And as a result, they’ve increased repeat purchases and these customers’ lifetime value (LTV).
“We will generally find a prospective buyer to give [dead stock] to as samples, share it with existing wholesale customers for them to give away at their stores, or share with those we know and love locally.Madhu Sharoff, founder & CEO of Kimbala
Generally speaking, your turnover rate should be between two and four. Anything less than two means you have too much dead stock, and anything more than four indicates you’re at risk of a stockout.
Similarly, your stock-to-sales ratio should generally sit around four. This indicates that you have enough stock available to avoid a stockout, but not so much that you’re racking up holding costs.
Together, these two inventory management KPIs indicate your brand’s inventory health (AKA, if your stock levels are “optimal”).
If your inventory turnover ratio is on the lower end, you can immediately improve this ratio by investigating which SKUs have become dead stock. Then, use the above methods to get rid of the excess inventory. (When you do this, cut these SKUs from your catalog completely.)
But long term, you can improve your turnover ratio and stock-to-sales ratio by generating accurate demand forecasts. Then, use this forecast to inform your operational plan. This way, you only purchase inventory that will sell in a reasonable timeframe.
However, say you have the opposite problem and are turning over product too quickly. How you should handle this depends on if it’s happening on a one-off basis or is a consistent challenge.
Look at your IMS’s historical sales and stock data to check which it is.
Was it a one-time thing? Then, generating more accurate demand forecasts for new products or any other items you typically keep in stock will fix your high turnover ratio (just like it’ll improve a low turnover ratio).
But if you’re consistently turning over inventory too quickly, chances are good you’re undercharging for that product. Regularly selling out might seem like a solid hype strategy. But if you can’t fulfill this demand, this hype ultimately won’t grow your business.
So, look at price elasticity. Test a few different, slightly higher price points. For example, you might try raising that product’s price by 5%, 10%, and 15% (best practice is to A/B test these new prices against the original price).
Ultimately, you’re looking for the highest price that leads to a healthy turnover rate (between two and four) and stock-to-sales ratio (roughly four).
When you find this new, higher price, cross-check that it doesn’t accidentally break another metric your business relies on. Specifically, you’ll want to look at your conversion rates, AOV, LTV, and repeat purchase rates.
Even with the best inventory planning process and system, supply chain issues or unexpected spikes in demand can put products on backorder.
As we mentioned earlier, selling on backorder performs radically better than simply marking products as “out of stock” and sending back-in-stock notifications.
But these items still see a negligible dip in conversions compared to selling the product in stock.
And you’ll want to know how that dip (no matter how small) affects your other metrics, like AOV and revenue per unit.
This way, you can quantify the cost of a stockout–even if you’re selling on backorder. Using this information, you can justify any costs of selling on backorder.
|Our team is currently working on building these inventory management metrics straight into the Cogsy dashboard.|
But say these numbers prove that selling on backorder doesn’t make sense for your brand (it might). Then, you’ll want to find other ways to keep your backorder rate as close to zero as possible, such as by:
Admittedly, most of these options will require more capital upfront. But if selling on backorder no longer makes sense for your brand, that’s likely a sign that your business is growing. And, in business, growth requires capital.
If you don’t have the working capital available to make these options happen, consider borrowing from a platform like Settle. Settle offers ecommerce brands flexible financing options so that being low on cash won’t impede growth.
|🤿 Dive deeper: How Settle works.|
Every DTC brand’s goal is to make the most revenue per unit sold as possible while still being fair.
One way to improve this inventory KPI is to increase your product markup. It’s simple–raise your price, and you’ll make more money.
However, this might make your prices uncompetitive and drive customers away. So, a better option is to lower your cost of goods sold (COGS) and cost per unit. There are many ways to do this, including negotiating better bulk discounts with your manufacturers (which we’ll dive into in a moment).
Another way to improve revenue per unit is to have a better discounting strategy. If you’re giving discounts out all the time, you’re going to have trouble with your revenue per unit. Instead, choose what discounts you offer wisely.
For example, schedule a monthly call with your sales and accounting team to hone in on your discounting strategy. This includes what discounts you plan to offer and when. Plus, any additional deals you can leverage to close a sale or retain a customer and under what circumstances.
Whatever discounting strategy you come up with in this meeting, you then need to stick with it. Every time you give out a discount willy-nilly, you reduce your average revenue per unit.
There are many ways to lower your cost per unit. For example, you can improve this inventory KPI by nurturing your relationships with your suppliers. In other words, submit consistent POs regularly.
Then, like negotiating safety stock, you can use this predictability to negotiate lower costs per unit and ultimately increase your gross profits. To do this, give your suppliers visibility into your long-term purchasing plan (such as by sharing your Cogsy-generated demand forecasts). To seal the deal, you might need to commit to a minimum number of purchase orders with this partner.
Just make sure to keep your supplier in the loop with what’s happening with your upcoming purchase orders once they commit to a lower price. This will ensure that the relationship stays healthy and might even give you leverage to negotiate even lower costs per unit in the future.
Another way to lower your costs per unit is by reducing the related variable costs. For example, would your landed costs be cheaper if you:
Likewise, you can reduce your storage costs by partnering with a storage solution like Flexe that pairs you with unused warehouse space. Then, get rid of excess amount of inventory (AKA, maintain optimal stock levels), so you’re only paying for the storage space you actually need.
You can further reduce the freight and storage space you use (and therefore pay for) by rethinking your product packaging design.
For example, a few years back, IKEA started packaging the base and seat of their best-selling Jules Office Chair in two separate boxes. And as a result, they’ve saved roughly $1.4M annually on storage space and landed costs.
“Ikea designs products with manufacturing and transit in mind from the get-go. They design for the realities of the supply chain, rather than having to make sacrifices for it.Katelan Cunningham, editorial director of Lumi
Of the 15 inventory management KPIs on this list, improving order cycle time might be the most important. That’s because the longer a customer waits to get their order, the more frustrating it is for everyone involved.
So, look for a third-party logistics (3PL) provider that distributes your inventory across several fulfillment centers.
For example, ShipBob does this for DTC brands worldwide, then fulfills their ecommerce orders from whichever fulfillment center is closest to the customer. This way, they can cost-effectively provide 2-day express shipping while cutting costs.
However, even with the most cutting-edge 3PL solution, order cycle time isn’t always an exact science.
For example, say you advertise 2-day shipping. But there’s a trucker shortage, so it’s actually taking closer to a week to get products to customers.
Chances are good that you’re going to aggravate lots of customers when you fail to deliver on your promise–even if it’s out of your control.
In these scenarios, a tool like Capabl can help you understand what your order cycle time period actually looks like and ensure consistency.
Say, for whatever reason, it’s taking longer to deliver goods than usual. Then, Capabl will let you know, so you can properly and proactively set expectations with customers.
This won’t necessarily lower your order cycle time in the short term. But it can help alleviate potential problems.
Plus, constantly monitoring this metric helps you keep a pulse on the customer experience. This will let you know if you deliver or exceed what you promise customers.
Or if you consistently fall short (even if it’s just for 1% of all customer orders), you’ll know to rethink your 3PL or what you’re promising customers.
Historically, improving these inventory management KPIs meant guessing what action you should take. It was time-consuming, labor-intensive, and needlessly complex. But not anymore.
Today, Cogsy and ShipBob make it easy to create a single source of truth. One where you can get the real-time insights you need to make short-term lifts and implement forward-thinking initiatives that’ll unlock growth.
ShipBob is a tech-empowered 3PL that streamlines how ecommerce brands fulfill orders and manage logistics. With it, you can easily view your most important inventory KPIs, inefficiencies and fulfillment metrics in a real-time dashboard.
Couple this with an ops optimization tool like Cogsy, and what you get is a proactive operational plan that’ll unlock revenue growth.
With Cogys, turn ShipBob’s data reports into:
Best part? Cogsy’s seamless ShipBob integration creates one powerful source of truth. That way, you can track all your inventory management KPIs. And more importantly, know exactly how to leverage those insights to improve your operations and grow your brand.
But don’t take our word for it – try Cogsy free for 14 days.
To monitor, measure, and analyze inventory performance, businesses first need to determine the most relevant performance indicators (KPIs) they want to track. The inventory metrics they choose help make informed decisions and improve inventory management processes. KPIs offer insight into the fill rate, order processing rate, rate of return, inventory turnover, customer satisfaction, demand, carrying costs of inventory, and more.
Depending on the specific goals, businesses can choose between several types of key performance indicators: quantitative and qualitative, financial, process, practical, leading, lagging, output, actionable indicators, etc.
A good key performance indicator (KPI) objectively measures progress toward a set goal. It should display the change in performance over a specific period and facilitate the decision-making process.