Are you efficient in your processes? Does your way of doing things make you stand out from the competition or fall behind? What aspects do you need to work on as soon as possible? Having performance indicators is what allows you to leave assumptions behind and know the real state of your logistics.
In addition, inventory management is a part of your ideal logistics when it comes to being monitored with these indicators. Working with indicators that are significant, easy to obtain, read and interpret is what will allow you to make better decisions.
Key performance indicators for your inventory
When choosing your indicators, remember that you need to know your internal performance (how efficient you are in your processes and what costs you have) and external (what service do you provide to your customers). You will need both to have a complete and true image.
These are some of the most used and most representative:
It is used to know how fast the merchandise moves in our warehouses. It can be measured by knowing how many times the inventory in our warehouse has been renewed over a certain period of time, dividing the total sales by the amount of product that we have stored. The higher the turnover, the lower storage costs we will be having, while a low turnover means that we have to keep the product in storage for a longer time (either until we sell it or until it has to be used/transformed).
This indicator measures the total value of the merchandise you have in the warehouse. The greater its sum, the greater value you will have leveraged if the merchandise is yours and waiting to be profitable. If the price of your inventory shoots up, you may have liquidity problems and/or mean that the necessary sales are not taking place.
Out of stock
Having a large amount of stock allows you to ensure sales and complete the orders received. However, storing product always has a cost. That is why you have to have great control over how many times you are out of stock, to help you refine the relationship between the demand you have and how much product you need to have at any given time. Overstocking can be just as detrimental as working without safety stock. In addition, the consequences of a stock out are greater than is sometimes believed.
This performance indicator of your inventory management shows how much merchandise, with respect to the total stored, is in a condition to be used. Either because it is in perfect condition or because it is within expiration dates, etc. It can be calculated as a percentage of the total units, by economic value… You can also establish how much unavailable stock we have and for which there is no replacement action underway. Low available stock should alert you to the possibility of poor storage conditions or low turnover, which causes merchandise to expire or deteriorate over time.
For how many days do we have enough stock if we stop receiving merchandise? This indicator is very useful for managing merchandise flows, purchasing processes (how long can my alternative suppliers take to send me more merchandise in the event of a problem, delivery and/or manufacturing times, etc.) and stock safety margins.
This indicator indicates the space of your warehouse that you are using in relation to the total available. It is logical to think that too small a percentage will be negative, since you will have underused space -and possibly unoccupied staff-. But so will an excessive utilization rate. If you are above 100%, it means that you will be using inappropriate places to store, such as corridors, beaches, merchandise consolidation areas, etc.
In addition, having very little margin compared to your total capacity will make you have difficulties in the face of unforeseen increases in merchandise or the accumulation of seasonal peaks.
Number of items and lines per order
This allows us to know how our orders are. Are they orders for many units of a single reference? Of many different references but with few units for each of them? Do we end up shipping orders as packages or as pallets? What would be more profitable?
This is one of the most representative performance indicators of your inventory management. Starting from the number of shipments that we take out and crossing it with the returns received, we can begin to look for the problems that we may be having during the preparation of orders.
In addition to knowing the numerical ratio, it is also interesting to keep track of the reasons for the returns, to find out if the problem is in the picking of the orders, in the expiration dates, in the state of the merchandise, in the order address, etc.
Sometimes our inventory only has stock to cover a part of the order. And while sometimes some merchandise may be shipped now and the rest later, it’s important to keep in mind how often this happens. Even if the sale is not lost (in some cases it will be lost), it is still a hassle for the buyer and may end up causing them to lose trust in us.
Perfect shipments are those that do not suffer from any problem from start to finish: compliance with manufacturing and/or delivery deadlines, correct merchandise in number and type, good condition of the products, etc.
It is very illustrative to carry out this exercise, since the number of perfect shipments is usually less than what is believed. For example: if we have stock 97% of the time, 98% of our products are in good condition to be delivered, we prepare well 98% of the orders and we meet the delivery deadline 93% of the time, only the 86.6% of our shipments will be perfect (97% x 98% x 98% x 93%= 86.6%).
well prepared orders
This is one of the necessary indicators to measure our percentage of perfect shipments. Knowing the percentage of correctly prepared orders makes it easier for you to know if you have a problem in this field. Do your employees need some kind of technological improvement to help them, such as digitally guided picking? Does the layout of the warehouse make it easy to place orders? Do they move too many meters to reach different merchandise that usually coincide in the same orders? Do you lack time to check that the order is executed correctly?
Receiving merchandise is also part of the inventory management process. And it can offer you many aspects to measure: how much space you need for your operations, how much of the space you have designated you use, how much merchandise you unload per day and dock, how much per operator, how long it takes from the time merchandise arrives until it is unloaded, coded, and stored etc
Knowing the number of SKUs you handle can be decisive for the warehouse design itself
Order preparation cost
If correctly prepared orders indicate the quality we give to the customer, the cost affects our efficiency (although without forgetting that a poorly prepared order will end up being an extra cost). Here you can also set various metrics: cost per order line, orders per hour, labor cost per order, etc. The time in the preparation of the orders is another piece of information that will allow you to better understand your costs.
Accuracy of your suppliers
Until now we have focused on measuring ourselves, but we also have to do it with our collaborators. Do they meet the requirements that we have requested? What economic repercussions do their delays or non-compliance cause me? Do we know which are the worst and the best to, when the time comes, make a decision?
Number of references
Regarding the number of references, once again we will be able to establish various metrics: total number of references that we handle, references present in our warehouse compared to the total catalogue, number of references that we have in stock…
This data can be so important that it influences the design of the warehouse itself. For example, in an inventory that has very few SKUs, we may use Drive In storage designs, optimizing space. While where we have many references, it is possible that we opt for selective racks, to be able to have them all within easy reach.
depreciation and obsolescence
Storing merchandise not only creates expense, but often causes merchandise to lose value. We have to record how much value we lose in products that go out of season, that expire, whose price falls during the time they have been stored without being sold, etc.
After establishing so many indicators to know the cost of various processes, it is hoped that we will create the way to obtain the total cost that our inventory supposes us. That is, how much we have to spend to store all our inventory. Labor, facilities, rentals, machinery, supplies, insurance… Any cost that allows us to know the total amount. Logically, subcontracting a logistics operator makes this calculation much easier.
Once this data is obtained, we can use it to find out the cost for each available pallet space, for each space used, for each kilo managed, etc.
Once we have decided which are the key indicators that we want to have controlled, we have to create a panel with them. In other words, a place where they appear grouped and it is easy to consult them (there are various software tools on the market to do so). If we have correctly designed our indicators, this panel will be essential for future decisions about our logistics and our inventory management.
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