In this brief article, we’d like to raise awareness of one of the reasons SMEs sometimes struggle to manage inventory effectively. That reason is measurement—or rather, the lack of it.
However, Instead of taking the usual line and explaining how important inventory metrics and KPIs are, this article instead focuses on three key questions about the inventory in your supply chain, which you should always be able to answer.
The idea is to highlight the most important things to know about your inventory, so you can think about which KPIs to put in place to answer the questions.
1) How Many Times do You Turn Over Your Inventory in a Year?
To answer this question, you should measure inventory turnover. If you don’t know how many times your inventory completely turns over, you simply cannot evaluate how much of your company’s capital is tied up in stock.
If your inventory is turning too slowly, you can run into cash-flow problems. You also risk losing money through inventory obsolescence, and you will never be able to manage inventory levels effectively.
For this reason, it is essential to know not only how many times your inventory turns, but also how that turnover compares with the average in your commercial sector or industry.
2) How Completely Does Your Company Meet Customer Demand?
If you only have a gut feeling as to the percentage of demand your business meets from available stock, the chances are your gut is wrong and your customers are less than satisfied.
If you really want to know how well you’re meeting demand, you need to implement a KPI to measure fill rate.
There are a number of ways to measure fill rate, so you will need to determine which metric best suits your operation, but you should always know what percentage of backorders, lost sales, and stock-outs is keeping you from a fill rate of 100%.
3) How Accurate are Your Inventory Records?
If your company is following the outdated practice of counting inventory once a year, it’s open to the drifting apart of physical inventory and recorded inventory. Over the course of a year, inaccuracies can become substantial, resulting in unfulfilled customer orders and/or the problems that come with storing excess inventory.
These problems include inventory obsolescence, which is typically accompanied by write-downs or write-offs, neither of which is good for business.
For best results, count your inventory at least four times per year, or better still, shift to a program of cycle counting. Be sure to implement a metric to measure the accuracy recorded during your inventory counts, so you can know how accurate your records are and set objectives for improvement.
Measurement: The Very First Step in Effective Inventory Management
If you’re unable to answer the three questions outlined in this article, your first action should be to implement the appropriate inventory KPIs to provide you with the necessary intelligence. When you can answer them, you will be a step closer to improving your inventory management, because as the (tired but true) adage goes, before you can manage it, you have to measure it.