You’ve launched your Business and are steadily getting orders from customers. You’ve built an inventory of products to ship them as soon as possible and handle more customers. But how do you ensure everything in your inventory is running smoothly, every day? How can you take your business to the next level?
Small business owners need to regularly monitor the important numbers about their inventory to ensure all processes are running smoothly. This enables them to easily identify areas where they can grow revenue, increase efficiency or streamline costs. Here are 7 key inventory metrics small business owners need to keep an eye on.
Inventory turnover tells you how many times a year your business is able to sell your entire inventory. Business owners don’t want to store too much inventory in a warehouse, as it increases the cost of maintaining them. A higher inventory turnover indicates the business is efficiently using its inventory items. It means your inventory is close to the customer demand and you are able to turn stock into revenue. It is calculated as “Cost of Goods Sold” / “Average inventory”.
Cycle time is the amount of time it takes from when an order is issued to when it is completed. Lower cycle time means the customer has to wait less for the delivery of item. It improves customer satisfaction and helps your business in the long run. You can break down cycle time into smaller time cycles (such as the time taken to process a purchase order) to quickly identify the bottlenecks and fix them.
Fill Rate is the percent of customer’s order that your business was able to ship. Higher the fill rate, more the customer satisfaction. Initially, it is necessary to monitor fill rate for each order. As your business grows and shipping volume increases, you’ll need to monitor fill rate for each type of item.
Order status tells you the present state of an order – whether it is “On-hold”, “Shipped”, “Cancelled”, etc. Tracking the number of orders by status, every day, shows you the health of your delivery pipeline. It also helps you identify and remove bottlenecks in your supply.
Rate of Return
Rate of return is the percent of shipped items that have been returned to you. They may be returned due to various reasons such as damages, defects, overdue, etc. It is important to monitor return rate due to each reason, over time. This helps you identify the main reasons for return and fix issues at their source.
Back Order Rate
Back Order Rate is the percent of placed orders that cannot be filled when a customer places them. It may be because you are out of stock, inaccuracies in inventory, etc. A high Back order rate means more customers have to wait till you fulfill their orders. Monitor this metric to identify what type of items have high back order rate and see if there are any trends(such as seasonal demand) for those items.
Perfect Order Rate
Perfect Order Rate tells you how many orders have been shipped without any incidents (such as defects, damages, delay, etc.). It is the ultimate goal of every Business to maximize this metric. It is necessary to monitor Perfect Order Rate for each category of item you ship so that you can identify the efficiencies behind it, and try to replicate them for other categories.
Monitoring the key inventory metrics regularly helps your team to manage Inventory with great efficiency. It enables you to spot issues and fix them immediately. It also helps you to easily identify areas of further improvement. A streamlined Inventory boosts customer satisfaction, improves brand value and increases profits.
Sreeram Sreenivasan is the Founder of Ubiq, a web-based Dashboard Reporting Application for SMBs. He’s interested in the latest Small Business Technologies & Trends. Prior to Ubiq, Sreeram worked at ZS Associates, a Global Consulting Firm, where he helped various Fortune 500 clients with Strategic, Sales & Marketing Projects.