The 12 Inventory KPIs That Matter Most in Retail

Good inventory management is essential to running a successful business. But stats suggest this is an area that many retailers are struggling to get a good grasp on:

Good inventory management is essential to running a successful business. But stats suggest this is an area that many retailers are struggling to get a good grasp on:

But there’s one full-proof way to prevent inventory management mistakes that can cost you dearly; spotting them before they start having a serious impact at your business.

How? By monitoring key inventory KPIs (among other retail metrics) that help you to identify in real-time how your business is performing.

In this post, we’re going to look at the 12 inventory KPIs that are most important for retailers to track.

12 Inventory KPIs that your business should be tracking

Ready to start tracking your inventory KPIs? Start with the following. 

1. Gross Margin Percentage

What is Gross Margin Percentage?

Gross Margin Percentage is a calculation of a retailer’s high-level financial position. It measures the revenue left over once the Cost of Goods Sold (COGS) has been subtracted from total product sales.

Why you should measure Gross Margin Percentage

Gross Margin Percentage is a simple inventory KPI way for measuring profitability over a defined time period. Unless you understand your gross profit margin, it’s impossible to know how well your business is performing.

How to measure it

Gross margin percent = (total revenue – cost of goods sold) / total revenue x 100

2. Inventory turnover

What is inventory turnover?

Inventory turnover refers to the number of times a business sells out and replaces its stock over a defined period of time. 

Why you should measure inventory turnover

Inventory turnover expresses how fast your inventory is moving, which indicates the strength of your sales and inventory management strategy. High inventory turnover is a sign of strong sales activity, but could also mean that you have insufficient stock to meet demand. Slow turnover can suggest weaker sales or excess inventory that’s slowing down movement.

How to measure it

There are a couple of different ways that businesses can calculate inventory turnover:

  • Cost of Goods Sold / Average Inventory 
  • Sales / Inventory

3. Days on Hand

What is Days on Hand?

Days on Hand (DOH) is a more specialized method of measuring inventory turnover on a daily basis. DOH tells businesses how long on average it takes for inventory to convert into sales.

Why you should measure Days on Hand

As an inventory KPI, Days on Hand tells you how much inventory liquidity your business has. The slower DOH is, the more effectively a company is managing its inventory and is less likely to run into issues  with dead stock. However, there are some exceptions. For example, any retailers will deliberately hold onto higher amounts of inventory when supply is uncertain.

How to measure it

Days on Hand = Inventory / Cost of Sales x 365

4. Stock to Sales Ratio

What is Stock to Sales Ratio?

Your Stock to Sales Ratio is the amount of stock you have on-hand versus the amount sold. This inventory KPI helps you to understand whether your inventory levels need adjusting.

Why you should measure Stock to Sales Ratio

Having either too little or too much inventory is very problematic for your business. Too much inventory means tying up a lot of capital, while too little can cause you to miss out on valuable sales opportunities. The lower your ratio is, the more effectively your business is allocating inventory.

How to measure it

Stock to sales ratio = inventory value / sales value

5. Sell-through Rate

What is Sell-through Rate?

Sell-through Rate is a measure of stock sold versus the amount you’ve purchased from the manufacturer or wholesaler. Sell-through Rate is an important inventory KPI for telling you how quickly this investment converts into revenue for your business.

Why you should measure Sell-through Rate

By knowing how quickly a certain product is selling, you can gauge consumer demand and know how many units you require. This enables you to avoid necessary discounting that affect your profit margins.

How to measure it

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

6. Rate of Return

What is Rate of Return?

Put simply, your Rate of Return is the percentage of orders that customers end up returning with a defined time period. 

Why you should measure Rate of Return

Returns equal lost revenue to your business, so it’s vital that you’re tracking how returns fluctuate over time to identify the underlying causes.

What is considered an acceptable return rate will vary depending on the nature of your business. For example, clothing retailers can see return rates as high as 40%, while a category like electronics generally sees much lower return rates.

How to measure it

Rate of Return = Returned items / total number of items sold x 100

7. Perfect Order Rate

What is Perfect Order Rate?

Perfect Order Rate refers to the total number of orders which meet the following criteria:

  • On-time delivery
  • Correct delivery location
  • Correct items in the order
  • No damage to items
  • Correct documentation

Why you should measure Perfect Order Rate

When all of the above criteria are present in an order, this indicates high customer satisfaction and a high likelihood of repeat purchases. In the reverse, a low Perfect Order Rate could result in worsening customer churn due to poor delivery experiences.

How to measure it

Perfect Order Rate = (Percentage of orders delivered on-time) x (percentage of correct delivery location) x (percentage of correct orders) x (percentage of undamaged orders) x (percentage with correct documentation)

Note: The above calculation refers to the Perfect Order Rate as described above, but businesses can substitute any criteria that’s relevant to their operation.

8. GMROI

What is GMROI?

Gross Margin Return on Investment (GMROI) measures how effectively your business is turning inventory investments into gross profit. The higher GMROI is, the higher the profit margins on your inventory are.

Why you should measure GMROI

GMROI helps merchants to understand whether they’ve striking a good balance between the cost of acquiring inventory and profit margins. When your GMROI is out of whack, it could result in your business making a loss.

How to measure it

Gross Margin Return On Investment = gross margin / average inventory cost

9. Average Inventory

What is Average Inventory?

Average Inventory refers to the amount of inventory your business has on-hand during a defined time period. The purpose of this inventory KPI is to ensure that your business is maintaining a steady flow of inventory, without sudden drops or spikes in supply.

Why you should measure Average Inventory

When you have reliable inventory levels, your business can both meet consumer demand and not be saddled with excess inventory that’s difficult to shift. If you don’t need to worry about stockpiling inventory due to supply issues, this allows you to focus on other areas of your business.

How to measure it

Average inventory = beginning inventory + ending inventory / 2

10. Lead time 

What is Lead time?

Lead time is the time it takes for a customer to receive their order after placing it. A long lead time indicates bottlenecks in the fulfillment process, while short lead times are a sign of streamlined workflows.

Why you should measure lead time

Lead time is an important inventory KPI because it measures how responsive your operation is. If lead time is longer than it should be, this is a sign of problems in the supply chain that are adding unnecessary time onto order processing. The longer it takes for customers to receive their order, the more customer satisfaction is impacted.

How to measure it

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

11. Holding costs

What are holding costs?

Holding costs refer to overheads created from storing and servicing your unsold inventory. This includes:

  • Storage
  • Utilities
  • Insurance
  • Labor
  • Obsolete inventory

Why you should measure holding costs

When your holding costs are high, this affects the profit margin of each sale. Since it isn’t always possible to ‘bake’ carrying costs into your product prices, this is a key inventory KPI to help you identify where holding costs can be rationalized to increase profitability.

How to measure it

Holding costs = total storage/service costs / total inventory value x 100

12. Inventory shrinkage

What is inventory shrinkage?

Inventory shrinkage refers to the amount of shock that retailers have on hand versus what their inventory system says is present. Inventory shrinkage occurs for a variety of reasons, including theft, damage, or inaccurate stocktaking.

Why you should measure inventory shrinkage

Some causes of shrinkage are difficult for your business to avoid, so it’s important to account for the extra stock you’ll need to prevent yourself from running out – without resulting in excess inventory. 

How to measure it

Inventory shrinkage = value of ending inventory – value of physically counted inventory

Optimize your inventory management by staying on top of the right KPIs 

Inventory KPIs play an important role in ensuring that retailers stay on track and identify operational issues that affect profitability. By tracking the health of your inventory management strategy, businesses can prevent revenue from leaking away from inefficient processes and improve customer satisfaction — one order at a time.  

For best results, automate your inventory management and reporting by using a retail management software like Vend by Lightspeed. Loved by retail store owners, managers, and cashiers alike, Vend lets you build your own inventory reports, so you can quickly gain the insights you need to make smarter business decisions. Learn more. 

About Francesca Nicasio

Francesca Nicasio is Vend's Retail Expert and Content Strategist. She writes about trends, tips, and other cool things that enable retailers to increase sales, serve customers better, and be more awesome overall. She's also the author of Retail Survival of the Fittest, a free eBook to help retailers future-proof their stores. Connect with her on LinkedIn, Twitter, or Google+.