Managing inventory is a complex business. Lots of activities, processes and people are involved in ordering, receiving, storing, picking, and shipping items with the aim of keeping customers happy with the complete orders that are on time.
Inventory Management
There are few basic reasons why an organization keeping inventory…, to start with avoiding Lead time, cover the uncertainty of supply chain to cater the seasonal demands. inventory ties up cash, if uncontrolled, it will be impossible to know the actual level of stocks.
Inventory ties up cash, if uncontrolled, it will be impossible to know the actual level of costs associated with inventory thus include ordering costs, setup costs, holding costs and shortage costs to name a few.
Thus, inventory management KPI’s are important as they help analyse and track the performance of inventory management activities. They help measure the progress of supply chain objectives and identify areas for improvement.
With a wealth of metrics available to help management the performance of your inventory department
Here are the 5 key functional metrics to look for the inventory healthiness and process flow.
1. Cost of Carry: -The total cost of all expenses related to storing unsold goods.
- Capital costs – investment in buying stocks.
- Storage costs – Warehouse and its maintenance
- service costs – insurance, security, IT & handling
- Risk costs – risk of losing values whilst stored.
Cost of Carry = Capital costs + storage costs + service costs + risk costs / Total inventory value
2. Backorder rate: - An order for an item is temporarily out of stock.
This Metric measures how many orders cannot be filled at the time a customer places them. A high backorder rate means your customer forced to wait which will adversely affect customer satisfaction and retention in long term.
Backorder rate = Number of undeliverable orders / Total number of orders
3. Scrap rate: - Refers to the items in stock that are no longer usable or sellable .
Items in stock that are no longer usable or sellable in their current form. It usually gets recorded separately with lower or zero value in accounting records. A well-managed quality control system can minimize scrap inventory to reduce waste and save cost.
Scrap rate = Scrap expenses over the period / Average inventory over the period
4. Inventory shrinkage: - simply the difference between recorded inventory and actual inventory.
simply the difference between recorded inventory and actual inventory. It may be due to clerical or administrative error, damaged goods, lost or stolen (vendor fraud or employee theft). Inventory lost to shrinkage results in lost profit.
Inventory shrinkage = Current inventory value – physically counted inventory value
5. Obsolete /Dead stock: - Items are no longer wanted or needed by the customers.
Any unsold items which are lying in your warehouse for a long time. these items are no longer wanted or needed by the customers.
Dead stock = Value of unsellable stocks in period / Value of available stock in period
Simply implementing KPI’s in departments does not bring the desired results for which it was indeed put across at the first place; they need to be tracked and communicated on a regular basis across your business then it will influence how employee’s carryout their jobs, employee’s needs to understand their performance and how they have individually impacted the departments performance.
Offer praise when you employees are performing well and feedback when performance needs to improve to keep everyone motivated towards the organisation’s common goal.
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