You may be familiar with supplier performance management, where various KPIs are used to measure suppliers’ performance. Based on these metrics, performance is recorded, tracked, and continuously improved. The same approach applies to inventory management activities. You should not underestimate the role of inventory management in business development. Inventory represents company assets that need to be managed carefully and optimally. There are several KPIs you can use to monitor inventory management effectively.

Delivery performance

This metric measures the percentage of orders that are delivered on time and in full (OTIF). “On time” means the order is delivered by the promised date. “In full” refers to orders delivered in the correct quantities, without any missing items. You can set a target for this metric—for example, 95% of orders should be delivered on time and in full. Why should we combine “on time” and “in full”? Because delivery is not truly effective if an order arrives late or an order is incomplete.

Lead times

Lead time refers to the period from when a need is identified to when that need is fulfilled. For example, when Company A requires 5,000 units of a product, the buyer prepares specifications and negotiates with suppliers to find the most suitable one. The chosen supplier is then tasked with fulfilling Company A’s requirements. Depending on the capacity of both parties, the order is delivered after a specified period. The duration from when the requisition is raised to when the order is shipped to Company A is known as lead time. Most companies aim to shorten this period to minimize waiting time and reduce the need to hold excessive inventory.

Rate of stock turn

If items remain in inventory for a long time and are not sold to the market, this indicates that sales performance is poor or the company is overstocked. A high stock turnover rate suggests strong sales, meaning the company sells and replenishes its inventory more frequently. This metric is calculated by dividing the Cost of Goods Sold by the Average Inventory.

Average inventory is calculated as (Opening inventory + Closing inventory) / 2.

Stock cover

This metric indicates how many days the current stock of a specific item will last if the company continues to use the item at a predicted rate. Once you have the stock cover information, you can determine when the stock needs to be replenished.

The stock cover = Current quantities in stock / Anticipated daily rate of usage

For example, if the stock cover is calculated as 3 days, but the lead time is 30 days and the order has just been placed, the company may experience a stockout. This could lead to production disruptions and a drop in revenue.

Stock out rate

This metric tracks the number of stockouts that occur when demand is raised. It is calculated by:

Stock out rate = (The numer of stockouts / Total number of orders) x 100

Businesses should aim to minimize this metric, as stockouts can negatively impact operations.

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