4 Inventory Metrics You Must Track In Your Inventory management System

Inventory Management System


Staying accustomed to the key performance indicators of your company is very important. It lets you know how your company is doing. For most business owners, the focus is in creating new or more products and they ignore some of the most important metrics altogether. If you have been doing this, it is time you allotted extra resources to inventory metrics. The metrics you track today will be instrumental resources to your business in the future.

There are so many fundamental metrics you have to follow as well as analyze for your company. There is even a good chance you have been analyzing these metrics already. The objective of this post, however, is not to focus on the obvious such as cycle time and turnover but on the 4 crucial metrics of an inventory management system that most retailers tend to ignore.

1. Seasonality (demand forecast)

Yes your business might not be seasonal but there are certain periods when you have more sales than others; it could be during the holidays or in winter. To better understand the trends, you need to look back 2 to 5 years. This will help identify your peak periods so you can then plan appropriately. Some of the plans you may need to implement include hiring more staffs during the high peak seasons (If brick & mortar) or cutting back on the inventory in the low seasons. This demand forecast will enable you to anticipate your future capacity requirements, growth opportunities and pricing. The good news is your inventory management system or inventory control software will play a big part in demand forecast.

2. Shrinkage

This is the difference between the stock you have on paper and the actual stock that is available. It simply refers to the inventory reduction that doesn’t result from legit sales. The formula used is: Ending Inventory Value – Physical counted inventory value. Shrinkage is mainly caused by shoplifting, employee theft, supplier fraud and administrative errors. The shrinkage amount varies from one retail sector to the other. In percentage, shrinkage in grocery stores is 3.6% whereas that in specialty men’s and women’s apparel is 1.2%. This is according to the survey by the National Retail Federation.

3. Product Performance

Priority has to be given to your top and lowest performing products. This knowledge will help stay on top of the sales, stock orders and merchandising and other things. Your product performance will help you know which products you need to stock up on, which ones need promotional pushes and so on. The inventory management system makes product performance tracking very easy. Don’t ignore the sales and product reports from your POS.

4. Customer Order Cycle Time

This is basically the amount of time that it takes for a client to receive an item after they place an order. Customer satisfaction is increased when the ordered item is received early or on time. To determine the customer order cycle time, you calculate the time difference from the order creation to the delivery data. That is: Delivery Date – Purchase Order Creation.

Metrics should never be ignored when running a business. They are the key to achieving optimal performance as they help you understand your business better. You should also note that the metrics vary based on the industry type of your business.