Improving Inventory Management


Inventory management plays an important role — too much inventory creates unsold inventory costs, too little inventory leads to customer dissatisfaction. Here are some important metrics for maintaining manageable inventory levels.  

  1. Inventory Turnover Rate - This measures how many times inventory has been sold and       replaced in a given period of time, either as Cost of Goods Sold divided by Average       Inventory or Sales divided by Inventory
  2. Average Days to Sell Inventory - This measures how long it takes to turn inventory into sales. (Inventory divided by Cost of Sales times 365).

  3. Average On Hand Inventory - To calculate for a given month, add beginning inventory to ending inventory and divide by 2.

  4. Holding Costs - This measures the cost of unsold inventory. To arrive at this number, include damaged inventory along with storage, labor and insurance costs

  5. Out-of-Inventory Costs - This measures the cost of running out of inventory. The calculation is simply one of estimating lost sales due to lack of inventory.

  6.  Overstocking - In order not to run out of inventory, companies need to maintain stock. The question is how much. The metric here is to have the cost of  overstocked goods (including storage charges) be less than the cost of running out of inventory.

  7. Lead Time - Calculate the sum of the time it takes a supplier to deliver product once the order has been placed plus the time that transpires between the need to order again

  8. Returns - This is the percentage of orders that are returned and restocked.

  9. Accurate Order Rate - This metric measures the percentage of orders fulfilled correctly, meaning correct items and quantities with no complaints or follow ups from customers.