What Are Your Inventory Management Metrics Telling You?

As we have said many times, we live in a “point, click and deliver” Internet environment. The customer’s mental shipping clock starts when they give you the order. One of the major issues in providing customer service is having the product in stock when the order comes in.

Among the strategies which will make you more competitive, increase sales and customer service, improved inventory management, including planning and forecasting, should be at the top of the list. This is especially true if you ship from multiple warehouses or stores. 

The starting point in improving your inventory management is to have the key performance indicators (KPIs) that will help you assess inventory management. To illustrate this, we have compiled the following table from a recent inventory metrics assessment of a client’s business which is hard goods, re-orderable and includes less than 10% of new product annually. The company does $25 million per year in direct sales.

Inventory Metrics
Initial order rill rate 67%
Inventory turn (annual) 5.8
Final order fill rate 99%
Order cancellation rate 5%
Cost per back-ordered unit $19.97/carton
Return rate 3.7%

 

Get Behind the Numbers

Before we start analyzing this business, let’s keep in mind that you need to get behind a business’ inventory metrics to really understand them or compare to another business. What we mean by this is the type of business, product characteristics, ability to forecast and reorder may cause the numbers to look better or worse than yours or others. We’ll see some examples below.

Initial Order Fill Rate

This is the percentage of orders shipped complete in 24 hours, excluding weekends. In today’s ecommerce environment, the general customer expectation is that you’re shipping immediately unless communicated otherwise. To understand initial order fill rate, if you have 1,000 orders today and you ship 700 orders complete – every line and quantity ordered by the customer – your initial order fill rate is 70%. Admittedly, a 70% rate is not where a business owner would want it to be. This metric is a great measure of customer service – collect it weekly and graph it in a rolling 52-week timeline. 

Delving into the initial order fill rate for this business, you’d find out that the company’s strategy is to lower its inventory investment for slower-selling product by drop shipping a significant percentage of products from vendors. While this is a good financial strategy, is drop shipping providing timely customer delivery? Do you have the support systems in place between yourself and the vendors to show status and service levels? 

Initial order fill rate varies by type of product, the ability to forecast a product using history, and the product’s reorder-ability. Since this is a hard goods product that is totally sourced domestically, we might see a higher initial order fill rate if the inventory is managed well – maybe as high as 85%. But in contrast the inventory turn rate could be considerably less. 

For an apparel or fashion business which has 50% new product each season, a 70% initial fill rate may be what they can achieve. This is because they don’t have the right selling history for new products to project from and they may have little or no ability to reorder.

A business-to-business company which has a low percentage of new products annually, and can get quick reorders from vendors, may have an initial order fill rate of 98% to 99%.

Inventory Turnover

This is calculated as sales at cost divided by inventory average at cost for 13 months (starting and ending inventory). A turn of 4.8 is good for the business cited above; drop shipping is probably yielding a higher turn. 

Final Order Fill Rate

This is the percentage of orders filled complete at the end of a period like a promotion or a peak season. What products kept the final order fill rate from being 100%? 

Order Cancellation

This is the percentage of gross demand (or orders) canceled because product was not available. It includes orders the company canceled because of sold-out product and orders the customer canceled due to their unwillingness to wait. How many dollars in sales are you leaving on the table each year? 

Cost of Back-Ordered Units

This includes customer service and fulfillment costs and shipping back-ordered product. In this case, the company spent $6.25 for total call center and fulfillment costs and $10 to ship the average back-ordered unit of product. 

Return Rate

This is the percentage of gross unit demand returned. You should report returns by vendor, item, color and size. Reasons may include wrong product shipped, damaged in shipping and customer choices like color or size. How can you reduce returns? Can you use better product descriptions to help customers better understand the color, fit or product use?

Create internal measurements and compare them historically to show how your business is improving. Inventory management measures such as these are key to getting more sales and higher service. 

Curt Barry is Chairman of F. Curtis Barry & Company

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