Inventory management is critical for any ecommerce brand growing up on Shopify today.

It’s a tedious task involving many internal operating processes, and people across many functional areas of the business are involved in planning, organizing, storing, packing, and shipping inventory worldwide.

By tracking inventory management Key Performance Indicators (KPIs), you can analyze and stay on top of the quantifiable metrics that help you understand how well your company manages its inventory assets throughout the supply chain and your inventory management processes. 

Why are KPIs important in inventory management?

Effective inventory management is about maintaining the right amount of stock to avoid excess supply while ensuring sufficient supply to meet market demand. It is a balancing act, and when done well, all of the brand’s marketing activities will work better. 

KPIs offer essential inventory analytics and measurable insights into how effectively your inventory processes perform. They also provide actionable data on demand, revenue, and more. 

Businesses can identify inefficiencies, reduce costs, and improve operations by tracking specific KPIs. 

For instance, monitoring the Inventory Turnover Ratio can help a company determine how quickly inventory is being sold and replaced, which is crucial for maintaining optimal inventory levels and managing working capital appropriately. 

Keeping an eye on the different KPIs enables ecommerce brands to adjust their inventory management strategies—and stay competitive and responsive to market demands.

19 most important inventory management KPIs

We list the top 19 inventory management KPIs to help you make data-driven decisions to optimize inventory levels, reduce costs, and improve overall efficiency.

Here's a quick glance at the 19 inventory management KPIs.

Time for the details—let's go into each of these KPIs and see what they're all about.

1. Holding costs

Holding costs represent the total expenses incurred to store unsold inventory. These costs include warehousing, insurance, utilities, depreciation, security, and even opportunity costs, which reflect the potential returns if the capital were invested elsewhere. 

Formula:

Holding Cost Percentage = (Inventory Holding Cost/Total Inventory Value) x 100

2. Stockouts

Stockouts happen when inventory is inadequate to fulfill customer needs. This situation can lead to lost sales, decreased customer satisfaction, and potential long-term damage to the brand’s reputation.

Formula:

Stockout Rate = (Expected Stockouts/Expected Demand Requests) x 100

3. Lead time

The lead time represents the duration from order initiation to completion, including production, processing, and shipping. Reducing lead time is crucial for maintaining a lean inventory and responding quickly to market demand.

Lead time affects reorder points and safety stock levels, making it a critical factor in avoiding stockouts and excess inventory.

Formula:

Lead Time = Order Delivery Date−Order Placement Date

4. Inventory accuracy

Inventory accuracy assesses how closely recorded stock levels match the actual physical inventory. High accuracy is vital for reliable decision-making and prevents overstocking, stockouts, and financial discrepancies. Regular audits and cycle counts can help maintain and improve inventory accuracy.

Formula:

Inventory Accuracy = (Physical Inventory Count/Recorded Inventory Count) × 100

5. Inventory days on hand

Inventory days on hand (DOH) indicates the average number of days inventory is expected to last, given the current sales rate.

This metric helps businesses assess how efficiently they manage their inventory and whether they need to adjust their purchasing or production processes.

‍Formula:

DOH = Average Inventory for the Year/Cost of Goods Sold × 365

6. Safety stock

Safety stock is the extra inventory kept on hand to protect against uncertainties in demand or supply chain disruptions. It acts as a buffer to prevent stockouts during unexpected spikes in demand or delays in replenishment. 

Formula:

Safety Stock = X × Y × Z​

Where:

X: Indicates the number of standard deviations needed to achieve the desired service level.

Y: Indicates a standard deviation of lead time. Reflects the variability in lead time. Calculate it using historical lead times.

Z: Indicates the average daily demand, calculated by dividing total sales by the number of days.

7. Stock availability

Stock availability measures the percentage of time that products are in stock and ready for sale. This KPI is crucial for customer satisfaction, as high stock availability ensures customers can find and purchase the products they want without delay. 

Formula:

Stock Availability = (Number of Days In Stock/Total Number of Days) × 100

8. Inventory shrinkage

Inventory shrinkage refers to loss due to theft, damage, spoilage, or administrative errors. Shrinkage can significantly impact profitability, representing a direct loss of goods that could otherwise be sold. 

Formula:

Inventory Shrinkage = (Recorded Inventory−Actual Inventory/Recorded Inventory) × 100

9. Deadstock

Deadstock refers to the stock that has not moved from the shelves for a significant period and is anticipated to remain unsold. 

Deadstock occupies valuable warehouse space and ties up capital, making it essential to identify and clear out deadstock regularly. Strategies to manage dead stock include discounting, bundling, or liquidating slow-moving items.

Formula:

Dead Stock Percentage = (Total Cost of Unsold Inventory/Total Inventory) × 100

10. Inventory turnover ratio

The inventory turnover ratio tracks how often a company’s inventory is sold and replenished within a given timeframe. A high ratio signifies effective inventory management, indicating rapid sales. A low ratio might suggest excess stock or slow-moving items.

Formula:

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory

11. Backorder rate

The backorder rate measures the percentage of orders that cannot be fulfilled when they are placed due to insufficient inventory. A high backorder rate can lead to customer dissatisfaction, lost sales, and potential long-term damage to the business’s reputation. 

Formula:

Backorder Rate = (Number of Delayed Orders Due to Backorders/Total Orders) × 100

12. Revenue per unit

Revenue per unit tracks the average revenue generated from each unit of inventory sold. This KPI helps businesses understand the profitability of their products and provides insights into pricing strategies, product mix, and sales performance.

‍Formula:

Revenue per Unit = Total Revenue/Total Units Sold​

13. Cost per unit

Cost per unit calculates the average cost incurred to produce or purchase each inventory unit. This metric is critical for determining product pricing, profit margins, and overall financial performance. 

‍Formula:

Cost per Unit = Total Costs (Fixed + Variable Costs)/Total Units Produced or Purchased

14. Stock-to-sales ratio

The stock-to-sales ratio compares the amount of inventory on hand to the amount of sales generated. It helps businesses assess whether they are holding too much or too little inventory relative to their sales performance.

A balanced ratio indicates efficient inventory management, while an imbalanced ratio may signal overstocking or understocking.

Formula:

Stock-to-Sales Ratio = Average Inventory/Net Sales 

15. Lost sales ratio

The lost sales ratio measures the percentage of sales lost due to stockouts. This KPI is crucial for understanding the impact of inventory shortages on overall revenue and developing strategies to minimize lost sales.

Formula:

Lost Sales Ratio = (Days Product is Out of Stock/Total Days in a Season) x 100

16. Average inventory

Average inventory represents the typical amount of inventory a company holds over a specific period. This KPI helps businesses balance having enough inventory to meet demand without overstocking, which can lead to higher holding costs. 

Formula:

Average Inventory = Beginning Inventory + Ending Inventory/2

17. Weeks on hand

Weeks on hand measure the number of weeks of inventory available based on current usage rates. This helps understand how long existing stock will last before needing replenishment.

To manage weeks on hand effectively, adjust inventory levels based on sales trends and forecasted demand.

Formula:

Weeks on Hand = (Current Inventory/Average Weekly Usage)

18. Sell-Through Rate

The sell-through rate measures the percentage of inventory sold during a specific period. It is crucial to evaluate how effectively products are moving through the sales cycle.

To improve the sell-through rate, focus on aligning inventory levels with demand, optimizing pricing strategies, and enhancing marketing efforts.

Formula:

Sell-through Rate = (Units Sold/Units Available for Sale) × 100

19. Rate of return

The rate of return indicates the proportion of returned products against the overall number of items sold. It is crucial for understanding product satisfaction and managing inventory.

Focus on improving product quality, refining descriptions, and enhancing customer service to control the rate of return.

Formula:

Rate of Return = (Number of Returned Items / Number of Sold Items) × 100

Best practices for measuring inventory management KPIs

Businesses can track KPIs in an Inventory Management System (IMS) or Enterprise Resource Planning (ERP). The inventory management software market alone is projected to grow to ~$8 billion by the end of the current forecast period in 2032.

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Effective KPI measurement ensures that inventory data is accurate, actionable, and aligned with evolving business goals. By following these practices, businesses can enhance inventory control, reduce product costs, limit margin-eroding discounting, and better meet customer demand.

1. Regularly update your data

Keep inventory data updated frequently to maintain accuracy in KPIs like Inventory Accuracy and Stockouts. In a fast-moving digital environment, it is ideal to have live or hourly inventory reporting. Regular updates ensure that your KPIs reflect the current state of your inventory—enabling timely decisions and adjustments.

2. Use automated tools

Implement inventory management software like GoodDay to automate the tracking of KPIs. Automation minimizes manual errors, speeds up data collection, and enhances accuracy for metrics such as Lead Times, Stock-to-Sales Ratio, and Sell-through Rate. 

3. Establish clear benchmarks

Set specific benchmarks for each KPI based on historical data and industry standards. Clear benchmarks provide a reference point for evaluating performance and help identify trends and discrepancies, which can guide improvements in inventory management strategies.

4. Monitor trends over time

Track KPI trends over several periods to identify patterns and changes. Analyzing trends in metrics like Inventory Turnover Ratio and Dead Stock helps in understanding long-term performance and making data-driven adjustments to inventory practices.

5. Integrate KPIs with business goals

Align your KPIs with overall business objectives to ensure they support strategic goals. For instance, connect metrics like Revenue per Unit and Cost per Unit to broader targets such as profitability and cost management, ensuring that inventory management efforts contribute to business success.

6. Conduct regular audits

Perform routine audits to verify the accuracy of KPI data. Regular audits help confirm the reliability of metrics such as Inventory Shrinkage and Average Inventory, identifying discrepancies and areas that need attention or adjustment.

7. Analyze root causes

When KPIs show deviations from targets—investigate the underlying causes. For example, if stockouts are frequent, inventory planning and demand forecasting processes should be analyzed to address and correct the issues, improving overall inventory management.

8. Provide training and support

Ensure that staff are trained in using inventory management systems and interpreting KPIs. Proper training improves the accuracy of data entry and the effective use of KPI insights—helping the team make informed decisions and manage inventory more efficiently.

Achieving efficiency through effective KPI management

Monitoring and managing inventory through KPIs is crucial for maintaining efficiency and meeting customer demands. 

Focusing on key metrics such as inventory turnover ratio, stockouts, and safety stock can help businesses gain valuable insights into their inventory performance. Effective KPI measurement improves inventory control and enhances profitability and customer satisfaction.

GoodDay provides a single source of truth, enabling you to track all your inventory management KPIs effectively. With this clarity, you can leverage valuable insights to optimize your operations and grow your brand. 

FAQs

1. What are inventory management KPIs, and why are they important?

Inventory management KPIs are metrics used to measure the efficiency and effectiveness of inventory processes. They are crucial for identifying issues, optimizing inventory levels, reducing costs, and improving overall operations. 

2. How can I reduce holding costs in inventory management?

To reduce holding costs, businesses can optimize inventory levels by using accurate demand forecasting, implementing just-in-time inventory practices, and improving inventory turnover rates. Regularly reviewing and adjusting inventory levels based on sales trends and demand patterns can help minimize unnecessary holding costs.

3. What is the best way to handle dead stock?

Handling dead stock involves identifying items that are not selling and taking actions such as discounting or bundling with other products. Regular inventory reviews and demand forecasting can help prevent dead stock by ensuring inventory levels align with sales trends.

4. How can I improve inventory accuracy?

Conducting regular physical counts, committing to regular supply and demand planning practices, and implementing robust inventory management systems like GoodDay can improve inventory accuracy. Regular audits and reconciliations between recorded and actual inventory can also help maintain high accuracy levels.