Analyzing inventory and logistics processes is crucial for ensuring business performance. Without a solid analysis method and continuous monitoring of key performance indicators (KPIs), businesses risk losing revenue and facing operational challenges. But which method should you use, and which KPIs should you track? Let's break it down.
Effective inventory management and forecasting methods are essential—not only for marketing strategies but also for minimizing waste, avoiding overstocking, and preventing stockouts. If you don't have a clear picture of the quantities stored in your warehouses, the value of your products may decline due to potential spoilage or obsolescence. This is why prioritizing inventory based on its lifecycle and contribution to your business success is critical.
The ABC method is a stock control system that categorizes inventory based on its individual value. The classification typically follows this structure:
From a quantitative perspective, the classification follows this distribution:
By segmenting inventory into these three categories, businesses gain insights into product performance, identifying the key items driving growth. Additionally, this data helps understand consumer behavior and purchasing habits.
Key Performance Indicators (KPIs) help monitor inventory, stock movements, and availability. They simplify decision-making by optimizing inventory planning and management based on real warehouse performance. Properly tracking these KPIs increases productivity and efficiency. Here are the most critical ones:
This KPI measures how many times a company’s inventory is sold and replaced within a specific period (typically a year). A high turnover rate indicates efficient inventory management and strong product demand, while a low turnover rate may signal overstocking or obsolete products.
Inventory Turnover Ratio Formula = Cost of Goods Sold (COGS) / Average Inventory
This metric represents the total cost of holding inventory, including storage, taxes, insurance, and depreciation due to obsolescence. Inventory carrying cost and inventory holding cost are the same thing. Tracking inventory holding costs helps identify inefficiencies in storage and assess the profitability of inventory management.
Inventory carrying cost formula = Cost of Storage / Total Annual Inventory Value x 100
Storage costs include storage, labor, transportation, handling, insurance, taxes and depreciation.
The carrying cost rate includes storage costs and financing expenses related to inventory.
This KPI calculates the percentage of products returned by customers. A high return rate may indicate quality issues or mismatches between product expectations and reality. Monitoring this metric helps enhance customer satisfaction and reduce return-related costs.
Product return rate formula = (Total Returns / Total Sales) × 100
GMROI measures how effectively a company turns inventory investments into gross margin. It indicates whether inventory purchasing decisions are profitable.
A high GMROI suggests strong inventory performance, while a low GMROI highlights inefficiencies.
GMROI Formula = Gross Margin / Average Inventory Cost
This KPI tracks the number of orders that cannot be fulfilled on time due to stock shortages. A high backorder rate suggests poor inventory planning or demand forecasting issues, impacting customer satisfaction. Conversely, a low backorder rate means most orders are fulfilled promptly.
Backorder Rate Formula = (Number of Unfulfilled Orders / Total Orders) × 100
Order cycle time represents the duration between when a customer places an order and when they receive it. This KPI provides insights into order processing and fulfillment efficiency.
Order Cycle Time Formula = (Delivery Date - Order Date) / Total Orders Shipped
A shorter order cycle time enhances customer satisfaction by ensuring faster deliveries. Analyzing this metric helps identify bottlenecks in the supply chain and improve delivery timelines.
This metric compares available inventory to sales within a given period, helping determine if stock levels align with demand.
Inventory-to-Sales Ratio Formula = Average Inventory Value / Net Sales
Shrinkage refers to inventory loss due to theft, damage, or discrepancies in stock records. Identifying shrinkage sources through audits and inventory checks helps implement preventive measures.
Shrinkage Rate Formula = (Recorded Inventory - Actual Inventory) / Recorded Inventory x 100
To achieve maximum efficiency, businesses must regularly analyze inventory and logistics processes using predefined KPIs. This ensures real-time visibility into warehouse performance.
The best way to achieve accurate inventory analysis is by using inventory management software. Erplain, a comprehensive and affordable SaaS solution for small and medium-sized businesses (SMBs), streamlines inventory management. It helps prevent stockouts, simplifies reordering, and enables smarter decision-making through in-depth reporting.
With Erplain, you gain access to:
In short, Erplain offers an intelligent, real-time inventory management solution to help SMBs thrive. Try it for free today!
