For a growing retail business, managing inventory turns out to be one of the most important aspects of running the business. Maintaining the right level of inventory is important for retailers so that they don’t end up losing sales because of the non-availability of stock.
Retailers do every possible thing to maintain the stock… but it is a tough job, right?
Why should you track inventory metrics?
Tracking inventory metrics is very important to maintain the normal flow in a business firm. It also helps in keeping the store out of extreme situations.
Many times a store will either runs out of stock or is over-stored with it. Such situations often lead to chaos and affect sales and/or profits.
This can be avoided with proper tracking and monitoring of these key metrics.
Key Inventory Management Metrics
We have identified and shortlisted these 10 key inventory management metrics that every retailer should know.
These metrics will help you manage your retail inventory efficient. Make sure you have the right stock level so that you don’t run out of stock and lose sales. At the same time, it will make sure you are not overstocked or carry dead inventory which is locking up your capital.
1. Inventory on hand
‘On Hand’ stock means the amount of stock physically present in your store or warehouse/storage location.
There are many aspects to this as well and it is necessary to understand them. One of the most important points that we should remember with this metric is that even if the product is sold, it is not subtracted from inventory on hand until it physically leaves the store or warehouse/storage location.
2. Inventory turnover
This helps you track how quickly your inventory is getting replaced (total sales/average value of inventory on hand).
The higher the inventory turnover rate is, the less time your inventory would have to spend collecting dust in the store and lesser would be the inventory cost. The rate of inventory also depends on the size and how the store functions.
For the retail store, the inventory turnover should be between 4 to 6 ideally. This will help keep your inventory carrying costs low.
3. Sales velocity
Sales velocity is a measure of how fast does your product sell when it is available in the store to the customers on the shelf.
This metric is important to demand planning. It also helps the store to prevent loss of sales from experiencing out of stock situations.
Retail stores should track the sales velocity not just for individual SKU’s but also at product category and brand level.
4. Days of cover
This refers to the number of days it would take to run out of supply if it was not replenished (Inventory on hand/average daily usage). This metric enables retailers to see how much inventory they need to stock up to maintain normal operations for a given period of time.
Depending on your products you may want to have 30 days or 60 days of cover. The days of covers metric impacts your inventory holding costs.
5. Sell-through rate
It is important to understand the difference in the amount of inventory a retailer receives from a manufacturer against what is sold to the customer. This metric helps the retailer to compare products against each other. It also gives an overall view of how a specific product or category does month over month.
The sell-through rate metric is used to calculate product discounts.
6. Cost per unit
Every business is commenced with the intention of maximum profit and minimum cost. Well, this metric refers to the measurement of a company’s cost to build or purchase one unit of product. (Variable cost plus fixed cost incurred by a production process/ number of units produced).
Knowing the average inventory cost per unit helps to set a profit margin and the pricing of the product.
7. Revenue per unit
Revenue per unit is the total amount of revenue a product generates, divided by the total number of units of the product sold.
This metric is critical when we consider the improvement, expansion or cancellation of a product from the company.
8. Cycle time
This refers to the total time it takes from when an order is first issued until it is completed.
This is the most crucial time period in an overall business cycle. The time to delivery is a critical metric for setting realistic expectations with final consumers.
9. Gross profit
Profits are something that every retail store seeks to attain. Profit plays a very important role in the daily activities of the business firm.
It refers to the company’s total revenue minus the cost of goods sold. Many small to medium size retail businesses operate with gross margin to the range of 25 to 35%.
10. Gross margin
The percentage of total sales revenue the company retains after paying the direct cost associated with producing the product. (Total sales revenue minus the cost of goods sold/total sales revenue).
How to apply the inventory management KPIs in practice?
Now that we have a good amount of information on inventory metrics, it is also essential to know how to apply the inventory KPIs into practice in real life. Whether you need warehouse management or retail store management, you still need to track these KPI’s.
So here are some points which will help you do so:
- Implement a mechanism to track your current inventory:
If you are just starting, you can use Excel or Google Sheet to maintain this. We have a Free Excel Inventory Tracking Sheet for you. Once you scale up you can look to transition to a modern cloud-based inventory management solution like Easyops.
- Implement a process for inventory management:
Make sure you keep a record of stock coming in (inbound), stock sold. You should also take inventory count periodically to make sure the inventory accuracy matches the system count.
- Use modern billing point of sale or retail system with retail analytics capabilities which will provide you the inventory metrics we discussed. The metrics provided will be accurate and real-time allowing you to manage your inventory in real-time.
If you were not tracking any of the above metrics for your inventory control, now is a good time to start doing so.
If there is any other metric that you have been tracking and found useful, we would love to hear about it. Do let us know how do track your metrics!
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