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3 key stock management KPIs for structure and direction

Apr 22, 2022

As an entrepreneur you want insights in the performance of your stock. Are you purchasing the right products? Can you…
As an entrepreneur you want insights in the performance of your stock. Are you purchasing the right products? Can you meet customer demand? How high are your stock storage costs? Unfortunately, time and administrative tasks often work against you to obtain the right data and make it manageable, measurable and analysable. KPIs can help you with this. What are KPIs? What is their purpose and how do you determine them? Find out in this blog how the metrics work together with inventory optimisation software, why KPIs are so important in stock management and which three key indicators we highlight.

What are stock KPIs?

 A KPI – also called Key Performance Indicator – is a metric to measure performance within a business and/or business unit. Setting up KPIs can help you to select the right data and convert it into concrete objectives. You will gain insight into the performance of your company stock by setting up stock KPIs. Do you have control over your stock? Are your purchasing decisions having the desired effect? By monitoring and analysing specifically formulated KPIs you obtain the answers to these questions. This makes setting up KPIs one of the most important steps to structure your business and to make data concrete and measurable. Do the KPIs indicate that your stock is not in balance with your sales or business objectives? Then you may want to start optimising your stock with the objectives to reduce lost sales, continue to meet customer demand and increase customer satisfaction, and increase revenue.

What criteria must a stock KPI meet?

To ensure that a KPI really helps you towards a strategic goal, it must meet a number of criteria.

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● SMART

A KPI needs to be SMART – Specific, Measurable, Achievable, Relevant and Timely. The SMART method shows whether the KPI really works.

● Strategic

It is important that a KPI is linked to the strategic goals of your company. In addition, it is important that employees are aware of the indicators and how they affect their work.

3 commonly used stock KPIs

Which stock KPIs do really add value? We look at three crucial KPIs that give you insight into the performance of your stock, storage costs and purchasing strategy.

1. Ratio of cost of stock to cost of goods sold

This KPI compares the cost of stock held at a given time with the cost of stock sold in a prior period. In general, it is better if the cost of your stock is not too high compared to the cost of sales. That would indicate that you hold more stock than is necessary and you need to adjust to achieve a healthy stock value. This KPI is not very complex to set up and monitor but it shows on a high level whether there is a balance between stock and sales. However, the KPI can be too simple if there is a clear reason why you – temporarily – keep more stock. For example, due to seasonal sales and/or long delivery times from your suppliers.

2.   Turnover rate in days

 The turnover rate shows – in days – how quickly products from your stock sell. A lower number of days is generally better, because it shows which products are popular and it means less storage costs. This KPI shows whether you have the right purchasing strategy and whether the purchasing and sales departments communicate well with each other. However, keep in mind that some products will naturally sell slower. For example, luxury items generally move slower, but that does not necessarily make them underperforming.

3.   Backorder percentage

 The backorder percentage is the percentage of orders in a certain period that were potentially delayed because a product was not in stock. In general, a lower value is preferred, as backordering may cause delays for the end customer. This KPI will also indicate whether your purchasing is proactive or reactive to customer demand. However, setting the indicator too low may encourage your purchasers to buy too much stock. This leads too high storage costs and possible obsolete stock and/or write offs. 

By monitoring these three KPIs, following the trends and creating clear action plans for underperformance, you can not only balance your stock management, but also align it with your sales and customer satisfaction goals.

How do stock KPIs and inventory optimisation software work together?

Monitoring data is a time-consuming task in many businesses. This can result in there being no time left to analyse and take follow up action on crucial indicators. Tracking KPIs becomes a lot easier with the help of automation. Inventory optimisation software updates your KPIs in a structured way and based on real-time data. These smart tools ensure that you do not lose time continuously creating metrics, but that you can focus on improving your stock management and purchasing strategy. AI purchasing optimisation software such as the software Optiply develops takes over the operational purchasing side so that you, as an entrepreneur, can focus on the tactical side. These are the areas where human input makes the difference, such as maintaining the relationship with suppliers, negotiating purchase prices and/or responding to any problems in the supply chain.

Stock KPIs provide structure and direction

Stock KPIs make your stock management more effective and give structure and direction to your business operations. KPIs ensure that you convert data into concrete, measurable and strategic goals that provide insight into the performance of your stock and purchasing decisions. Automated tools, such as Optiply’s inventory optimisation software, provide real-time data that allows you to monitor KPIs. As a result, you, as an entrepreneur, can keep your stock in balance and improve purchasing decisions. This leads to fewer lost sales, higher customer satisfaction and – more importantly – an increasing business revenue.

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Innovate with Optiply

Do you want to know how your shop can apply innovative inventory optimisation? Book your demo now. Within 30 minutes you will know how AI and forecasting models play a role in an innovative way by creating more revenue and spending less time on purchasing.

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