Managing Inventory: What Are Your Inventory 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 customer orders.

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

The starting point in improving your inventory management is to have the key performance indicators that will help you assess inventory management. To illustrate this, we have compiled the following table from a recent inventory assessment of a client’s business which is hardgoods, reorderable and less than 10% new product annually.

Initial Order Fill Rate 67%
Inventory turnover (annual) 5.8
Final Order Fill Rate 99%
Order Cancellation Rate 5%
Cost of Backordered Unit $19.97/carton
Return Rate 3.70%

 

Get behind the numbers. Before we start analyzing this business, let’s keep in mind that you need to get behind a business’ 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 not as good as yours and others compared to. We’ll see some examples below.

Initial order fill rate – percent of orders shipped complete in 24 hours excluding weekends. In today’s e-commerce environment, the general customer expectation is that you are 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, 70% on the face of it, this 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 rolling 52 weeks.

Delving into the initial order fill rate for this business, you’d find out that the company’s strategy is to lower inventory investment for slower selling product by drop shipping a significant percent of the products from vendors. This is a good financial strategy, however, if you employ drop shipping are you providing timely customer shipping? Do you have the support systems between you and the vendors to show status and service levels?

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

In contrast an apparel or fashion business which has 50% new product each season, year to year, 70% may be a what they can achieve. The reason is that they don’t have product selling history for new products to project from and they may have little or no ability to reorder.

Or a business to business company which has a low percent new product annually - and can get quick reorders from vendors - may daily have an initial order fill rate of 98% to 99%.

Inventory turnover - calculated as sales at cost divided by inventory average at cost for 13 periods (starting and ending inventory). A turn of 4.8 is good for this business; drop shipping is probably yielding a higher turn for this business.

Final order fill rate - percent of orders filled complete at end of a period like promotion or season. What products kept the final order fill rate from being 10%?

Order cancellation – percent of gross demand (orders) cancelled because product was not available. Include company cancels for sold out product and customer cancels for unwillingness to wait. How many dollars of sales are you leaving on the table each year?

Cost of backordered unit of product – 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 $10.00 shipping the average back ordered unit of product.

Return rate – percent of gross unit demand returned. Report returns by vendor, item, color and size. Reasons may include wrong product shipped, damaged in shipping, customer choice such as color or size issues, etc. How can you reduce returns?

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

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