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inventory management

Inventory management metrics: A comprehensive guide

Having the right inventory on hand at the right time is essential to running a successful business. This complete guide covers everything you need to know about inventory management: what it is, types of inventory management, key metrics to track and inventory management formulas.

Table of contents 

What is inventory management?

Inventory management, also known as inventory planning or inventory control, is the process of ensuring stock is held at the right quantity, in the right place, at the right time and at the right cost.

Managing your inventory effectively has far-reaching positive impacts on your business. Keeping enough products on hand ensures you can meet demand, provide a positive customer experience and avoid issues like backorders. At the same time, preventing overstocks can help minimise storage costs and avoids problems like spoilage.

So, how do you make sure you have the right amount of inventory on hand to keep your business running smoothly?

This is where inventory management KPIs can help.

What are inventory management KPIs?

Inventory management KPIs are metrics that help you track and make decisions about your stock. Key performance indicators for inventory management can give you useful insights about your customer demand, ordering processes, sales, supply chain and more. They can also help you pick up on issues early, so you can make adjustments before they impact your bottom line.

How to measure inventory management

Businesses typically measure inventory management by tracking metrics across four key areas:

  • Sales KPIs
  • Receiving KPIs
  • Operational KPIs
  • Employee KPIs

Monitoring metrics across different business areas can be useful for figuring out what’s working well and what needs to be improved. For example, you might discover that your stock levels are appropriate for your customer demand but your delivery times are too long. Or you might find that your recorded inventory levels don’t match what’s on the shelf. Inventory management metrics help you monitor your entire fulfilment cycle, improve processes and ultimately grow your business.

Inventory metrics: Sales KPIs

Inventory management sales KPIs tell you how your inventory is moving and how efficiently you’re managing it in relation to sales. Important inventory metrics for sales include:

Inventory Turnover Rate

Inventory turnover rate, also known as the inventory turnover ratio or inventory turn, is a measure of the number of times inventory is sold, used or depleted in a certain period, such as a financial year. This inventory KPI tells you whether you have an appropriate amount of stock on hand compared to how much you’re selling. 

You can compare your inventory turnover rate with averages for your industry or historical data for your business. A low inventory turnover rate could signal weak sales or too much inventory, while a higher rate is a sign of strong sales but could also indicate inadequate inventory levels.

Inventory Turnover Rate formula

Inventory turnover rate = cost of goods sold / average inventory value

Days on Hand (DOH)

Days on hand (DOH), also known as the days to sell inventory (DSI) and days inventory outstanding (DIO), shows the average number of days it takes for inventory to turn into sales. The average varies from industry to industry, but generally a lower DOH is preferred, as it indicates optimal inventory management.

Learn more about the days inventory outstanding (DIO) calculation.

Days on Hand (DOH) formula

Days on hand = (average inventory for period / cost of sales for period) x 365

Weeks on Hand (WOH)

Weeks on hand (WOH) shows the average number of weeks it takes for inventory to sell. Like Days on Hand, a lower WOH generally shows efficient inventory management while a higher WOH can signal too much stock or other problems.

Find out more about calculating weeks on hand.

Weeks on Hand (WOH) formula

Weeks on hand = (average inventory for period / cost of sales for period) x 52

Stock to Sales Ratio

The stock to sales ratio measures the amount of stock on hand compared to the number of sales being made. A lower ratio is typically preferred but a higher ratio can sometimes be expected, such as when a business is growing quickly and needs additional inventory on hand to meet growing demand.

Stock to Sales Ratio formula

Stock to sales ratio = $ inventory value / $ sales value

Sell-through Rate

Sell-through rate measures the amount of inventory you’ve sold compared to the inventory you’ve received, usually over a month. It helps determine how efficiently your supply chain is operating.

Sell-through Rate formula

Sell-through rate = (# units sold / # units received) x 100

Backorder Rate

Backorder rate calculates the number of orders that can’t be immediately fulfilled as a percentage of total orders over a certain period. This metric shows how well you are meeting customer demand and keeping products stocked. Generally, a lower backorder rate indicates efficient inventory management.

Backorder Rate formula

Backorder rate = (# delayed orders due to backorders / total # orders placed) x 100

Accuracy of Forecast Demand

Accuracy of forecast demand is a percent of how close the on-hand quantity of inventory is to the forecasted demand. It shows how closely the predicted demand for products matches the actual demand.

Accuracy of Forecast Demand formula

Accuracy of forecast demand = [(actual – forecast) / actual] x 100

Product Sales

Product sales, also known as sales revenue, calculates the income from customer purchases minus any returns or cancelled sales, over a specific period such as a month or year.

Product Sales formula

Product sales = gross sales revenue – sales returns – discounts – allowances

Average Revenue per Unit (ARPU)

Average revenue per unit (ARPU) measures how much revenue you’re generating on average from selling one unit of inventory. It can also be used to measure how much revenue a business is generating per subscriber or user, for subscription-based businesses.

Average Revenue per Unit (ARPU) formula

Average revenue per unit = total revenue for period / average units sold for period

Cost per Unit

Cost per unit calculates how much it costs to produce or buy and deliver a single unit of a product to an end consumer. This metric is particularly useful for businesses that produce or sell large quantities of the same product.

Cost per Unit formula

Cost per unit = (fixed costs + variable costs ) / # units produced

Gross Margin Return on Investment (GMROI)

Gross margin return on investment (GMROI) shows how much revenue is being earned compared to how much is invested in inventory purchases. It can give you a picture of how well you’re able to turn stock into cash, minus the cost of buying inventory.

Gross Margin Return on Investment (GMROI) formula

Gross margin return on investment = gross margin / average inventory cost

Inventory metrics: Receiving KPIs

Inventory receiving KPIs, also known as warehouse KPIs, measure how efficiently you receive and store inventory. Important receiving KPIs for stock management include:

Time to Receive

This measures the rate at which your business brings in new stock and prepares it for sale. Time to Receive shows the efficiency of your stock receiving process, with a lower number indicating greater efficiency.

Time to Receive formula

Time to receive = time for stock validation + time to add stock to records + time to prepare stock for storage

Put Away Time

Put Away Time measures how long it takes your business to store stock. A lower number indicates more efficient processes.

Put Away Time formula

Put away time = total time to store received stock

Supplier Quality Index (SQI)

Supplier Quality Index (SQI), also known as Supplier Quality Score (SQS), evaluates how well a supplier meets your expectations against various criteria. Generally, each variable is given a weighted score to calculate an average, for example:

Supplier quality index = (product quality x 45%) + (prompt reply x 10%) + (delivery quality x 30%) + (quality assurance processes x 15%)

Inventory metrics: Operational KPIs

Operational inventory KPIs tell you how well your business is running in relation to inventory-related processes. Important operational KPIs include:

Lost Sales Ratio

Lost sales ratio shows the average number of days a specific product stays out of stock compared to the expected rate of sales for that product. A high lost sales ratio indicates that you may not be keeping enough stock on hand to meet demand.

Lost Sales Ratio formula

Lost sales ratio = (# days product is out of stock / 365) x 100

Perfect Order Rate

Perfect order rate measures how many orders are shipped without issues like delays, damage or errors over a period such as a month or year. A higher perfect order rate demonstrates efficient processes and that a business is providing an excellent customer experience.

Perfect Order Rate formula

Perfect order rate = [(# orders delivered on time / # total orders) x (# orders complete / # total orders) x (# orders damage free / # total orders) x (# orders with accurate documentation / # total orders)] x 100

Inventory Shrinkage

Inventory shrinkage calculates the amount of stock a business should have on hand but can’t account for. Shrinkage can result from damage, spoilage, theft or inaccurate inventory tracking.

Inventory Shrinkage formula

Inventory shrinkage = recorded inventory value – physically counted inventory value

Average Inventory

Average inventory measures the average value or amount of inventory a business has on hand over a given period, such as a quarter. Average inventory values can be consistent throughout the year, or can change for businesses whose sales fluctuate seasonally. 

Discover how to calculate average inventory.

Average Inventory formula

Average inventory = (total inventory month 1 + total inventory month 2 + total inventory month 3) / 3

Inventory Carrying Cost

Inventory carrying costs, also known as holding costs, are the costs to store and hold inventory until it’s sold to the customer. This includes warehousing, insurance, rent, labour and the cost of any products that can’t be sold. A lower inventory carrying cost generally indicates a financially efficient business.

Inventory Carrying Cost formula

Inventory carrying costs = [(inventory service costs + inventory insurance costs + capital costs + storage costs) / total inventory value] x 100

Order Fill Rate

Order fill rate measures the percentage of orders you fulfil without any backorders or stockouts. A higher order fill rate signals that you’re efficiently meeting customer demand.

Order Fill Rate formula

Order fill rate = (total orders shipped / total orders placed) x 100

Order Cycle Time (OCT)

Order cycle time (OCT) is the average time it takes for a business to fulfil an order, from the time the customer makes the purchase through to delivery. It demonstrates the efficiency of a business’ fulfilment process, including picking and packing, shipping and delivery.

Order Cycle Time (OCT) formula

Order cycle time = (time customer received order – time customer placed order) / # total shipped orders

Stock-Outs

Stock-outs, also known as out-of-stock items, is the portion of products not available to ship when a customer places an order. This KPI shows a business’s ability to meet customer demand.

Stock-Outs formula

Stock-outs = (# items out of stock / # items shipped) x 100

Lead Time

Lead time measures the time it takes for a customer to receive a product after they order it. This metric helps evaluate the efficiency of a business’ entire supply chain, including inventory tracking, order processing, shipping and delivery. A lower lead time signals a well-run business.

Lead Time formula

Lead time = order process time + production/dispatch lead time + delivery lead time

Dead Stock

Dead stock refers to products that are unlikely to ever sell due to spoilage, becoming obsolete or other reasons. Monitoring the percentage of dead stock is important because it shows how efficiently a business is selling or using inventory, and whether or not there is ongoing demand for its products.

Dead Stock formula

Dead stock = (amount of unsellable stock in period / amount of available stock in period) x 100

Available Inventory Accuracy

Available inventory accuracy shows the difference between the recorded inventory levels and what is actually on the shelf. Lower accuracy can demonstrate errors in the inventory tracking process or loss due to theft or other causes of shrinkage.

Available Inventory Accuracy formula

Available inventory accuracy = (# counted items that match record / # counted items) x 100

Inventory metrics: Employee KPIs

Employee KPIs measure the efficiency of your staff in relation to inventory management and order fulfilment. Important employee metrics for inventory management include:

Labour Cost per Item

Labour cost per item, also known as unit labour cost, shows how much you’re spending to procure/ produce and sell one unit of inventory. This KPI includes staff wages and any additional labour costs related to order fulfilment.

Labour Cost per Item formula

Labour cost per item = # total units of inventory / total labour expense

Labour Cost per Hour

Labour cost per hour is a general measure of how much an employee costs a business on an hourly basis. This KPI can be used to track the hourly cost of labour related to inventory management and order fulfilment, such as warehousing staff.

Labour Cost per Hour formula

Labour cost per hour = (employee annual gross salary / # weeks employee works in a year) / # hours an employee works in a week

Simplify inventory management tracking with QuickBooks

Inventory tracking can be time-consuming, especially for small businesses. QuickBooks helps you effectively manage your stock, so you always know what you have and what you need before you even need it. 

Track inventory on hand, get alerts for reorder levels and get insights on what you buy and sell with QuickBooks’ inventory management tracking software.


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