BEST PRACTICES IN INVENTORY METRICS

Jan 01, 2007 10:30 PM  By

Unless a company has a proprietary credit program, inventory will generally be its largest balance-sheet asset — and knowing standard inventory metrics is key to protecting that asset. Here are some best-practice standards:

INITIAL ORDER FILL RATE

Customer orders shipped complete

Advanced fashion: 70%-80%

Reorderable, basic apparel: 80%-90%

Gifts/housewares: 85%-95%

Business products: 98%-100%

FINAL ORDER FILL RATE

Of the orders taken over the life of a catalog, the percentage of customer orders ultimately shipped 100% complete

Advanced fashion: 90%-95%

Reorderable, basic apparel: 95%-99%

Gifts/housewares: 96%-100%

Business products: 100%

RETURN RATES

Percentage of gross demand that is returned by the customer regardless of the reason

Advanced fashion: 20%-40%

Reorderable, basic apparel: 10%-20%

Gift/housewares: 2%-4%

Business products: 1%-3%

CANCELLATION RATE

The percentage of customer demand that is cancelled by either the customer (from backorders) or the company (permanently out of stock)

Apparel: 2%-5%

Gifts/housewares: 2%-4%

Business products: 1%

INVENTORY TURNOVER RATE

The annual cost of goods sold divided by the average inventory, at cost

Apparel: 3-5

Gifts/housewares: 4-6

Business products: 6-8

GROSS MARGIN RETURN ON INVESTMENT (GMROI)

You’ll need to know the turnover to measure your gross margin return on investment: maintained margin (decimal) × turnover = GMROI. Our studies indicate that good performance is over 2.00. To see how even small improvements in either gross margin or turnover can improve results, plug in your stats. Improve one or the other by a moderate amount and see how the GMROI improves.