15 Inventory Metrics CEO’s Can’t Ignore in 2024

Chief of Staff and Interim COO @ Flieber

As of late 2023, many large retailers are still struggling to balance their inventory levels. Merchants and supply chain leaders are fighting to reduce inventory glut and protect margins as carrying costs increase.

But finding the right balance between your sales and inventory is a tall order. To keep overhead low and profit margins high, understanding your inventory is crucial.

Here are some of the top metrics leading brands use to track inventory, plus tips for how and when to apply them for better sales, profitability, and cash flow management. 👇

What are inventory metrics?

Inventory metrics are key performance indicators (KPIs) used by retailers to evaluate and optimize the inventory management process. They provide insight into the health of a retail operation, including whether a business is stocking out too often, or spending too much capital on overstocked inventory.

Why is it important to track your inventory metrics?

The right inventory management KPIs can help you make better decisions on how to reduce operating costs, improve cash flow, and grow sales.

These insights are critical for business performance benchmarking and for leading data-driven conversations among both your senior leadership teams and your frontline staff.

To hit the next growth level, you first need to know where you stand.

However, inventory management is literally the stuff of science. With endless metrics to consider, you need to know which ones will be most effective in capturing attention and buy-in from the rest of the decision makers on your team.

In the following section, we’ll explore 15 of the best inventory metrics to help you reduce costs and maximize sales.

The top 15 inventory management KPIs to track

Before you start tracking your inventory management KPIs, take a moment to check in with your overarching business goals.

Effective inventory planning goes beyond having the right list of metrics or flashiest software. How you apply your inventory formulas is the true test of your decision making.

As you scroll through this list, consider which metrics best support your unique objectives. Are there any you’re using that don’t align?

1. Inventory turnover ratio

Inventory turnover ratio (ITR), or inventory turnover rate, measures how many times you sell and replace your stock within a specific period. To find your ITR, divide the cost of goods sold (COGS) by the average value of inventory within a given time frame (typically one year).

The inventory turnover ratio can help you understand whether you’re making enough sales and how the overall business is performing.

Formula:

Inventory Turnover Ratio = Cost of Goods Sold / Average Value of Inventory

When to use it:

Use inventory turnover ratio when you want to know how fast your company is moving its inventory, and whether you’re making a healthy amount of sales relative to inventory costs.

Note that sometimes a higher inventory turnover ratio means you’re stocking out often, so ITR is not an ideal metric for measuring inventory efficiency.

2. Weeks of supply

Weeks of supply (WOS) tells you how many more weeks your inventory will last, for any given SKU, product category, supplier, or overall. It can be based on either your current sales rate or or predicted rate of future sales (assuming no major changes in seasonal demand).

WOS can help you understand whether your inventory levels are healthy and make sure your inventory lasts until your next purchase order comes in. However, on its own, it’s not a very precise metric, and can lead to excess inventory.

Formula:

Weeks of Supply = Current Inventory / Average Weekly Units Sold

When to use it:

Use WOS to assess your demand forecasting, compare how inventory levels for different SKUs measure up, and alongside other metrics to help decide when to re-order and in what quantities.

3. Days of inventory

Also known as days sales in inventory, days of inventory, or days sales of inventory (DSI), this is the average amount of time, in days, that it takes to clear all the inventory you currently have in stock. DSI tells you how fast inventory moves through your business, and how efficient you are at making sales.

Unlike other inventory management metrics, optimal DSI depends highly on the type of goods sold. Consumer packaged goods (CPGs) clear much faster than furniture or kitchen appliances, so a healthy DSI looks very different for each retail business.

Formula:

Daily Sales Inventory = Average Inventory Value / Cost of Goods Sold x 365 days

When to use it:

Use DSI to evaluate your sales efficiency and how well your SKUs sell, especially when comparing with other brands and providers of similar goods.

4. Inventory to sales ratio

Inventory to sales ratio (I/S ratio) represents the relationship between the capital you’ve allocated to inventory and your total number of sales during a given period.

The lower your I/S ratio is, the more efficient you are in allocating capital to inventory with respect to your revenue. However, if your I/S ratio is too low, you could be at an increased risk for lost sales due to stockouts and low-in-stock items.

Formula:

Inventory To Sales Ratio = Average Inventory Value / Net Sales

When to use it:

Use I/S ratio to assess whether you’re investing the right amount of capital in stock.

5. Inventory accuracy

Inventory accuracy measures the relationship between your recorded inventory data and your actual, physical inventory levels. It tells you how good of a job you’re doing at keeping an accurate, up-to-date count of the stock you have.

While inventory accuracy is rarely perfect, an accurate count helps avoid inventory shrinkage and ensures that your other metrics are calculated properly.

Formula:

Inventory accuracy = (1 – (Variance / Recorded inventory)) x 100

When to use it:

Use inventory accuracy to keep your records up-to-date, ensure your warehouse is operating efficiently, and identify issues with theft, damaged products, or mismanaged returns.

6. Carrying cost of inventory

Carrying cost of inventory, also called holding cost, is the cost of storing inventory in a warehouse until you sell, move, or liquidate it. Your total carrying costs or total cost of storage can include many different elements such as, warehouse space, labor, opportunity and lost capital costs, dead stock inventory costs, insurance and taxes, administrative costs, handling, shrinkage, and more.

Measuring inventory carrying costs can help you understand if you’re spending too much on holding inventory relative to the value of that inventory.

Formula:

Carrying Cost of Inventory (%) = Total Costs of Storage / Total Inventory Value x 100

When to use it:

Use carrying cost of inventory to figure out whether high holding costs are hurting your profits or preventing you from growing your margins.

7. Cost of inventory

The cost of inventory is the total cost of ordering, carrying, and stocking out of inventory. It may or may not also include paperwork and administration, as well as other associated costs like shrinkage, taxes, damage costs, and more.

The simplest way to measure the cost of inventory is to subtract the amount of inventory you have at the end of a time period (usually one year) from the total inventory you started with and amassed during that time.

Formula:

Cost of Inventory = (Beginning Inventory + Inventory Purchases) = Ending Inventory

When to use it:

Use cost of inventory to find out whether you’re spending too much overall on inventory costs, and whether optimizing your inventory and supply chain could improve profits.

8. Order cycle time

Order cycle time (OCT) is the average time (not including carrier shipping time) that it takes your business to process and fulfill an order once a customer makes a purchase.

A short order cycle time means your business is highly responsive to customers and is picking, packing, and fulfilling customer orders efficiently.

Formula:

Order Cycle Time = (Delivery Date – Order Date) / Total Orders Shipped

When to use it:

Use order cycle time to measure the operating efficiency of your warehouses or 3PL providers. A long order cycle time might mean you need to improve your warehouse layout, retrain workers, invest in better fulfillment technology, or find a new logistics partner.

9. Gross margin

Even though gross margins are not an Inventory metric, it is intimately connected. Your gross margin measures how much profit you made relative to the costs of the goods sold (COGS). It can be expressed as a dollar value or percentage. The higher your gross margin, the healthier and more profitable your business is overall. Your growth margin also tells you how much extra capital you have available to invest in acquiring new customers and scaling your business.

The definition of a healthy gross margin varies widely by industry, and can fluctuate significantly over time based on economic factors, sector performance, and more.

Dollar Formula:

Gross Margin ($) = Total Revenue - Cost of Goods Sold (COGS)

Percentage Formula:

Gross Margin (%) = Total Revenue - COGS / Net Sales x 100

When to use it:

Use gross margin to determine how profitable the business is, and whether you need to boost revenue, reduce costs, or both to achieve greater results.

10. Sell-through rate

Your sell-through rate (STR) is the total amount of inventory you sold during a given time period (usually 30 days), expressed as a percentage of the stock you received from manufacturers during that time.

The sell-through rate can help you figure out which of your products are most and least popular, order the right quantities from suppliers, reduce storage costs, and manage cash flow more effectively.

Formula:

Sell-through Rate = Number of Units Sold / Number of Units Received

When to use it:

Use sell-through rate to measure the individual performance of each product, make better merchandising and storage decisions about specific SKUs, and prioritize high-performing products.

11. Stockout rate

Stockout rate is the percentage of SKUs that aren’t in stock when they’re needed in order to make a sale. Stockouts are expensive, so it’s important to keep this number as low as possible.

The higher your stockout rate, the more you spend on refunds, backorder solutions, expedited shipping, advertising to recoup lost business, marketplace storage penalties, and more.

Formula:

Stockout Rate = Items Not In Stock / Total Available Items In Inventory

When to use it:

Use stockout rate to ensure you’re maintaining healthy inventory levels and avoiding stockouts.

12. Backorder rate

Backorder rate is the percentage of customer orders you can’t fulfill right away because you don’t have enough inventory, assuming the customer consents to backordering the product and doesn’t cancel the order.

Your backorder rate measures both how well you’re managing inventory and how well you’re performing in terms of customer service. A poor customer experience is more likely to result in canceled orders, while customers are more likely to wait when they’re happy with the brand experience.

Formula:

Backorder Rate = (Total Undeliverable Orders / Total Number of Orders) x 100

When to use it:

Use backorder rate to figure out which of your products are bestsellers and plan larger purchase orders accordingly. You can also use it to improve the customer service experience while you adjust quantities in your inventory planning system.

13. Fill rate

Fill rate, also known as order fill rate (OFR), is the percentage of customer orders you can fulfill from current inventory, without running out of stock, relying on backorders, or losing sales. A high fill rate means you’re managing inventory efficiently while meeting customer demand.

There are other types of fill rate metrics used for other stages of fulfillment, including line fill rate, case fill rate, warehouse fill rate, and vendor fill rate.

Formula:

Order Fill Rate = (Total Completed Orders / Total Orders) x 100

When to use it:

Use order fill rate to ensure you’re keeping enough inventory in stock to satisfy your customers.

14. Perfect order rate

Perfect order rate (POR) is the percentage of orders you fulfill without any errors, damages, irregularities, or other issues. Perfect orders adhere to the 6 Rights™ of online retail: the right PRODUCT, in the right PLACE, in the right QUANTITY, at the right TIME, with the right QUALITY, and at the right COST.

A low perfect order rate is usually indicative of issues somewhere in your fulfillment process, like receiving, picking, and packing orders, invoicing, and/or shipping carrier reliability.

Formula:

Perfect Order Rate = (Percent of On-Time Orders) x (Percent of Complete Orders) x (Percent of Damage-Free Orders) x (Percent of Orders with Accurate Documentation) x 100.

When to use it:

Use perfect order rate as a measure of your overall order fulfillment processes. If it starts going down, you may need to reassess shipping carriers, warehouse practices, or 3PLs, to see how you can boost your fulfillment accuracy without increasing costs or lead time.

15. Return rate

Return rate, or rate of return (ROR), measures the percentage of products returned by your customers, relative to the number of products sold. A high return rate tells you that a product is not matching customer expectations in some way.

A high return rate can also lead to increased reverse logistics costs, expensive churn and higher customer acquisition cost (CAC). Use this metric to pinpoint quality issues and take steps to improve your return rate.

Formula:

Return Rate = (Number of Returned Units / Units Sold) x 100

When to use it:

Use return rate when you notice a spike in returns or to check in on how satisfied customers are with your products and brand.

See it. Measure it. Improve it.

If you can’t measure it, you can’t manage it. The right inventory management KPIs can give you clarity about what is and isn’t working in the business, so you can take action to improve your results.

But it’s important to note that, no matter which KPIs you choose, each is just one piece in a much larger puzzle. The right inventory metrics can help you solve for X, but they can’t give you a complete view of your business, or tell you which steps to take next to drive more growth.

Flieber is the user-friendly sales forecasting and inventory planning platform that helps brand operators make better business decisions.

It compares your inventory consumption over time against your replenishment thresholds to tell you when and how much inventory to order. You get automatic alerts when your delivery date falls below your minimum number of days of stock, or when a stockout is unavoidable, so you can adjust your sales pace and protect your ROI.

Learn more about Flieber’s sales forecasting platform. Or, if you’re already selling more than $1 million USD on Amazon and/or Shopify, you can sign up to get started today.