吃瓜黑料

By tracking and improving their inventory management KPIs, brands can boost efficiency, maximize cash flow, and increase profitability.

A few months back, we did our friends over at听听a solid and broke down the inventory management KPIs that every retail brand needs to track.

In honor of our听new integration with them, we are expanding on that because we realized that tracking those KPIs doesn鈥檛 do your business much good if you don鈥檛, improve those numbers.

So, we鈥檙e revisiting those听听and diving deeper into how you can boost each one.

What are inventory management KPIs?

Key performance indicators (KPIs) are quantifiable inventory analytics companies use to gauge progress toward a specific goal.

Ecommerce businesses use听inventory management听KPIs to gain insight into costs, turnover, customer demand, revenue, process, and supply chain efficiency. Tracking and improving inventory KPIs enables brands to boost efficiency, maximize cash flow, and increase profitability.

15 inventory management KPIs to track

You can鈥檛 improve the inventory management KPIs you don鈥檛 track.

Well, maybe you can accidentally. But, long term, this laissez-faire strategy won鈥檛 be replicable (allowing you to do it repeatedly) or scalable (enabling you to grow).

So, which inventory KPIs should you track and intentionally improve? In collaboration with ShipBob, we identified 15 inventory management KPIs that every retail brand needs to keep a pulse on:

How to improve your inventory management KPIs

Improving your inventory management KPIs isn鈥檛 a one-size-fits-all approach. It depends on which metric you鈥檙e trying to move. So, looking at the above list, let鈥檚 break down actionable ways you can improve each one.

Inventory holding costs

Inventory holding costs听are directly tied to your stock levels. So, to keep inventory holding costs down also means maintaining optimal stock levels.

Ideally, this means only keeping stock on hand that will actually sell in the next 90 days or so. Then, whenever you鈥檙e running low, receive the next听replenishment听just in time to avoid a stockout.

But this perfect scenario doesn鈥檛 always work in practice鈥搉ot with unreliable听supply chains听or shifting consumer demands.

And when things go wrong, most brands react by ordering too much (and usually placing orders too late). This makes a stockout all but inevitable. Not to mention it drives up inventory holding costs when the order finally arrives.

If you want to lower inventory holding costs, a better strategy is to build a听12-month operational plan听(which 吃瓜黑料 can help with). With this plan, you can proactively work with your manufacturer to ensure they can fulfill your future purchase orders (POs).

Plus, you can use this plan to negotiate terms with your manufacturer that allow you to place smaller POs more often. This ensures that you鈥檒l always have the product you need without needing to order a ton upfront and tie up听working capital.

However, the danger of forecasting 12 months out is that things can change fast. So, how can you ensure that your plan doesn鈥檛 leave you heading in the wrong direction? You track how you鈥檙e measuring up to the original plan (吃瓜黑料 can do this too)!

This way, you can understand and visualize what鈥檚 happening and take immediate action. For example, say you see an unexpected jump in sales this week. It likely won鈥檛 throw off your entire operational plan, but it could have a butterfly effect six months down the line that puts you at risk of a stockout.

But knowing that this happened in real-time allows you to communicate to your manufacturer that you鈥檒l need to increase an upcoming purchase order. That way, they can ramp up production to fulfill a bigger purchase order or fulfill the next PO sooner than scheduled.

Stockouts

That moment when customers are on your product page with their credit cards out? There won鈥檛 be a better moment to close the sale. But a听stockout听can quickly ruin that.

When you鈥檙e out of stock on a product, roughly听听will purchase a similar offering from your competitor. And many of those that don鈥檛 buy elsewhere will lose interest before the product comes back in stock.

So, the best solution is to avoid stockouts and lost sales in the first place. And that same 12-month operational plan that keeps inventory holding costs down also prevents stockouts by ensuring you have enough product available.

But say things go really wrong, and you see that a stockout is inevitable.

This might sound counterintuitive, but try accelerating it. Meaning, call out that you only have a 鈥渇ew left in stock鈥� on the product page to create scarcity. Top brands like听Amazon,听Hotels.com, and听Lulu鈥檚听do this to entice customers who might otherwise wait to complete the purchase.

You can create even more urgency by noting how long the customer will have to wait if they don鈥檛 buy before you go out of stock. For example, 鈥渂uy now and get in two days; next available ships in 4-6 weeks鈥� can really put pressure on customers to buy.

However, you only want to accelerate the inevitable if you have strategies to offset the stockout.

Historically, brands would just watch their conversion rates crash to zero when they went out of stock. Then, they started sending听back-in-stock notifications, but those don鈥檛 perform much better (they only work 5-15% of the time).

Neither of these strategies is proactive enough to recoup revenue lost to stockouts.

Instead, try听selling on backorder. This allows you to continue offering out-of-stock products to customers with a promise to ship the desired products as soon as the听inventory is replenished.

Brands that sell in backorder see a marginal drop in conversion rates compared to when the product is in stock.

But some people can鈥檛 afford to wait for the product to come back in stock. When this is the case, it鈥檚 best to recommend similar or related products that the customer might be interested in.

McKinsey reports that roughly听听come from recommending other products, making it a highly effective strategy.

But this strategy might not work if the product is intended as a gift. When this is the case, you can use a tool like听听to drive the sale instead.

Govalo offers customized gift cards on sold-out product pages that customers can send directly to their intended recipient. (For context, 吃瓜黑料 makes you send gift cards to your email, then forward it to the recipient.)

For one, offering gift cards in place of sold-out products leads to a better customer experience for everyone involved:

• The customer gets a gift in time
• The recipient picks out exactly what they want themselves
• You don鈥檛 have to deal with handling a return

Plus, the end recipient will听spend $59 more听than their gift card value on average. Meaning, you鈥檒l also generate more revenue than if you sold the initial product as a gift.

Lead time

Shortening your lead times听starts by working with the right supply chain partners鈥攅specially at the manufacturer and supplier levels.

For example, using a local supplier, working directly with the source manufacturer, or consolidating vendors will all cut down the time it takes to receive purchase orders.

And the longer you work with these partners, the more leverage you鈥檒l have when asking for 鈥渦ncommon鈥� arrangements or terms. But for newer partnerships, you can earn this leverage by guaranteeing your business to some extent.

Like your brand, it鈥檚 cheaper for your manufacturers and vendors to retain you as a customer than to acquire a new one. So, the reliability of your business becomes currency in the negotiation.

To do this, share your 12-month operational plan with your manufacturer. Then, commit to fulfilling a minimum number of those POs with them. You can even outline the rough timeline for when you鈥檒l place these orders for some additional insurance.

This long-term commitment can then make short-term, smaller inconveniences on the manufacturer鈥檚 side tolerable.

For example, you could reasonably ask the manufacturer to prioritize your purchase orders without additional expediting fees. This way, you鈥檙e not waiting days or weeks for the manufacturer to even start processing the PO on their end.

Or, a bit more unconventional, you could ask your manufacturer to always hold extra听safety stock听for you (for example, 5% of your average purchase order). And that they ship out that safety stock as soon as the PO is placed.

That way, even if your average听order lead time听is 90 days, you could have the first 5% in as little as 30 days. And this small replenishment can buffer your brand from stockouts while your manufacturer works on fulfilling the rest of the order.

Inventory accuracy & Inventory shrinkage

Most of the time, when听inventory accuracy听is off, it鈥檚 because of inventory shrinkage. And unfortunately, you won鈥檛 know that your inventory shrunk until you take stock.

Sure, there are technologies available that can hypothetically help you spend less time taking stock, like garment trackers. But robots can鈥檛 actually count the number of items you have on hand at a given moment.

So, to ensure accuracy, you need to be disciplined enough to routinely take stock the old-fashioned way. That means having two separate people count how much of each SKU you have on hand. Then comparing the results.

If the two counters don鈥檛 come up with the same number, they need to recount. And only once both parties agree on how much you actually have on hand can you compare it to how much you鈥檙e supposed to have on hand.

Admittedly, this task can be time-consuming and labor-intensive鈥攅specially if you have hundreds or thousands of units on hand. But by maintaining optimal stock levels, you鈥檒l naturally keep your听inventory levels听as low as possible and lighten the task load.

Plus, if you can be disciplined enough to run these audits at least once a month, you鈥檒l naturally see shrinkage decrease. That鈥檚 because internal theft accounts for听of all inventory shrinkage.

But if you鈥檙e constantly tracking how much of each SKU you have available, you鈥檒l discourage employees from thinking they鈥檒l get away with stealing and reduce听inventory risks.

In addition to taking stock, small business advisor Greg Crabtree suggests in his book,听, that retail brands also run weekly accounting exercises.

That鈥檚 because inventory inaccuracies and increased shrinkage decrease your gross profit margins. But if you鈥檙e like most retail brands, you鈥檙e taking care of your accounts on a monthly or quarterly cadence.

In other words, you鈥檙e tracking the numbers retroactively, and you鈥檒l only learn that something went wrong after the fact.

But by monitoring gross margin percentage or gross profit percentage week over week, you could identify potential inventory problems, like shrinkage, before it becomes a serious problem.

Safety stock & Inventory days on hand

Maintaining enough safety stock without increasing inventory days on hand goes back to maintaining optimal stock levels.

Ops optimization tools like 吃瓜黑料 pull historical sales data when calculating your optimal stock levels (this number naturally includes the right amount of safety stock). Then, it monitors those stock levels in real-time to ensure they stay within that optimal threshold.

When it鈥檚 time to replenish, 吃瓜黑料 will notify you and have an optimized PO ready for you to submit. This way, you effortlessly maintain optimal inventory levels and avoid a stockout.

For a human, this can be a tedious and labor-intensive responsibility. Not to mention, you鈥檙e typically working off spreadsheets with slightly outdated information. Meaning, you鈥檙e likely to act too late and make the wrong move.

Whereas, 吃瓜黑料 can automate this task by keeping a 24/7 real-time eye on your inventory levels. This way, there are no surprises about how many items you have available.

Plus, it鈥檒l identify early indicators of a potential butterfly effect in the works. And it will recognize these patterns weeks sooner than a human analyst could.

That鈥檚 because when something changes (like longer lead times or sudden spikes in demand), 吃瓜黑料 forecasts our various scenarios from worst case to best case. Then, it tracks how your actual performance measures up.

With these insights, you can understand the potential effect these recent changes will have on your long-term growth. And as soon as the tool identifies which scenario you鈥檙e operating within, it鈥檒l let you know so you can proactively plan how to respond on time.

Stock availability

To calculate your true stock availability, you need to understand your seemingly hidden incoming or outcoming units.

Typically, these discrepancies don鈥檛 get calculated into stock availability because they鈥檙e not visible in your inventory management systems (IMS). And without a system to account for these units, you鈥檒l likely end up overselling or overstocking.

For example, say you鈥檙e out of stock on your best-selling t-shirt today. But you have a purchase order with 1k of these t-shirts currently in transit.

When that order arrives, you鈥檒l have 1k t-shirts you can sell, right? It depends.

Say your marketing team has already committed to a huge promotion where they鈥檙e giving away 500 units of this bestseller. And this promotion starts as soon as this replenishment arrives.

Then, those 500 units (called 鈥渙utcoming units鈥�) aren鈥檛 available for sale.

So, when you finally get your purchase order, you鈥檒l only have 500 t-shirts available to sell, despite having 1k in the warehouse.

The trouble is when these marketing promotions happen, most ops teams don鈥檛 know they鈥檙e happening. And the brand oversells this t-shirt, leading to a lot of very frustrated customers as a result.

Luckily, 吃瓜黑料鈥檚听marketing event feature factors upcoming promotions and sales into your operational plans.

As a result, it seamlessly balances your marketing and operations team鈥檚 needs to ensure outcoming marketing units won鈥檛 impact your sales revenues.

On the flip side, your return process could be introducing a significant number of unaccounted incoming units.

Most return merchandise authorization (RMA) systems don鈥檛 automatically feed into your inventory management software. The idea was that most items aren鈥檛 returned in a condition where they can be resold.

However, that鈥檚 not true for all units, so what happens to the returns you can resell?

Typically, they鈥檙e put back on the floor as听phantom inventory. Meaning they鈥檙e not accounted for in your stock levels. And if the return is a slow-moving product or there鈥檚 a ton of it, it could jack up your inventory holding costs.

For example, say people returned 5 units of that best-selling t-shirt this month.

If you鈥檙e a bigger brand that sells 1k+ units of that product every month, this discrepancy isn鈥檛 a huge deal. That鈥檚 because the difference is marginal, and the product will sell all the same.

But say you鈥檙e a smaller brand, or it鈥檚 a slow-moving SKU that you only sell 20 of in a month. Then, those units account for 20% of your recorded available stock.

Meaning, you鈥檒l restock well before you have to and likely overstock because the ghost inventory isn鈥檛 documented in your IMS. And because you can鈥檛 assume this problem is contained to one SKU, you鈥檒l see higher stock holding costs across the board as a result.

To avoid this, create a system where your RMA feeds data on returns into your IMS.

While this can be done manually, that leaves a lot of room for error. Instead, the best option is to automate the process through an integration compatible with both tools.

Dead stock

Generally speaking, a healthy business has听15% dead stock听(or less) in its active inventory.

But for direct-to-consumer (DTC) brands, that number typically creeps up toward 33%. This ties up capital and radically drives up operational costs. And the best way to handle this dead stock is to get rid of it fast.

However, when does an SKU officially become dead stock? Unfortunately, there鈥檚 no hard-and-fast answer. Instead, it comes down to your best, most brutal judgment. Meaning if you think it鈥檚 dead stock, treat it like dead stock.

To inform this decision, look at three turnover rates in your inventory management system:

1. The average turnover rate for all your products.
2. The SKU in question鈥檚 average turnover rate.
3. The SKU in question鈥檚 current turnover rate.

Say the SKU is moving slower than it historically has, but it is still turning over faster than most items. Then, it鈥檚 safe to say it鈥檚 not dead stock yet鈥搄ust in a lull.

But if the SKU has stopped turning over almost entirely, then it鈥檚 dead stock, and you need to get rid of the remaining units. Yes, all of the remaining units鈥揺ven if the product is seasonal and likely to come back in style the following year.

The only exception would be if the item is collectible and will appreciate enough value to cover the related holding costs. (Again, use your best, most brutal judgment.)

When you identify an SKU as dead stock, there are a few ways you can get rid of it.

For example, most brands will first try听bundling听the dead stock SKU with a complimentary best-selling product.

While you鈥檙e working through the remaining inventory, this strategy will hopefully increase your average order value (AOV) and cover some of the holding costs that the dead stock items accrued.

If bundling doesn鈥檛 work and you鈥檙e just looking to break even, put the item on clearance at the lowest possible price you can sell a product for. Similar to bundling, this price should ideally offset some of the related hidden costs.

But say you鈥檙e not worried about the short-term gain, or you already know you鈥檙e going to have to eat your margins. Then, give the dead stock away as a sample or gift as a branding play.

For example, the ready-to-drink chai brand听听gifts non-expired dead stock to community partners, customers, and their team. And as a result, they鈥檝e听increased repeat purchases听and these customers鈥� lifetime value (LTV).

Inventory turnover rate & Stock to-sales ratio

Generally speaking, your turnover rate should be between two and four. Anything less than two means you have too much dead stock, and anything more than four indicates you鈥檙e at risk of a stockout.

Similarly, your stock-to-sales ratio should generally sit around four. This indicates that you have enough stock available to avoid a stockout, but not so much that you鈥檙e racking up holding costs.

Together, these two inventory management KPIs indicate your brand鈥檚 inventory health (AKA, if your stock levels are 鈥渙ptimal鈥�).

If your inventory turnover ratio is on the lower end, you can immediately improve this ratio by investigating which SKUs have become dead stock. Then, use the above methods to get rid of the听excess inventory. (When you do this, cut these SKUs from your catalog completely.)

But long term, you can improve your turnover ratio and stock-to-sales ratio by generating听accurate demand forecasts. Then, use this forecast to inform your operational plan. This way, you only听purchase inventory听that will sell in a reasonable timeframe.

However, say you have the opposite problem and are turning over product too quickly. How you should handle this depends on if it鈥檚 happening on a one-off basis or is a consistent challenge.

Look at your IMS鈥檚 historical sales and stock data to check which it is.

Was it a one-time thing? Then, generating more accurate听demand forecasts for new products听or any other items you typically keep in stock听will fix your high turnover ratio (just like it鈥檒l improve a low turnover ratio).

But if you鈥檙e consistently turning over inventory too quickly, chances are good you鈥檙e undercharging for that product. Regularly selling out might seem like a solid hype strategy. But if you can鈥檛 fulfill this demand, this hype ultimately won鈥檛 grow your business.

So, look at price elasticity. Test a few different, slightly higher price points. For example, you might try raising that product鈥檚 price by 5%, 10%, and 15% (best practice is to A/B test these new prices against the original price).

Ultimately, you鈥檙e looking for the highest price that leads to a healthy turnover rate (between two and four) and stock-to-sales ratio (roughly four).

When you find this new, higher price, cross-check that it doesn鈥檛 accidentally break another metric your business relies on. Specifically, you鈥檒l want to look at your conversion rates, AOV, LTV, and repeat purchase rates.

Backorder rate

Even with the best inventory planning process and system, supply chain issues or unexpected spikes in demand can put products on backorder.

As we mentioned earlier, selling on backorder performs radically better than simply marking products as 鈥渙ut of stock鈥� and sending back-in-stock notifications.

But these items still see a negligible dip in conversions compared to selling the product in stock.

And you鈥檒l want to know how that dip (no matter how small) affects your other metrics, like AOV and revenue per unit.

This way, you can quantify the cost of a stockout鈥揺ven if you鈥檙e selling on backorder. Using this information, you can justify any costs of selling on backorder.

But say these numbers prove that selling on backorder doesn鈥檛 make sense for your brand (it might). Then, you鈥檒l want to find other ways to keep your backorder rate as close to zero as possible, such as by:

• Placing larger purchase orders (even though this means tying up more capital).
• Expediting your transit methods by switching from, say, from sea freight to air.

Admittedly, most of these options will require more capital upfront. But if selling on backorder no longer makes sense for your brand, that鈥檚 likely a sign that your business is growing. And, in business, growth requires capital.

If you don鈥檛 have the working capital available to make these options happen, consider borrowing from a platform like听. Settle offers ecommerce brands flexible financing options so that being low on cash won鈥檛 impede growth.

Revenue per unit

Every DTC brand鈥檚 goal is to make the most revenue per unit sold as possible while still being fair.

One way to improve this inventory KPI is to increase your product markup. It鈥檚 simple鈥搑aise your price, and you鈥檒l make more money.

However, this might make your prices uncompetitive and drive customers away. So, a better option is to lower your听cost of goods sold (COGS)听and cost per unit. There are many ways to do this, including negotiating better bulk discounts with your manufacturers (which we鈥檒l dive into in a moment).

Another way to improve revenue per unit is to have a better discounting strategy. If you鈥檙e giving discounts out all the time, you鈥檙e going to have trouble with your revenue per unit. Instead, choose what discounts you offer wisely.

For example, schedule a monthly call with your sales and accounting team to hone in on your discounting strategy. This includes what discounts you plan to offer and when. Plus, any additional deals you can leverage to close a sale or retain a customer and under what circumstances.

Whatever discounting strategy you come up with in this meeting, you then need to stick with it. Every time you give out a discount willy-nilly, you reduce your average revenue per unit.

Cost per unit

There are many ways to lower your cost per unit. For example, you can improve this inventory KPI by nurturing your relationships with your suppliers. In other words, submit consistent POs regularly.

Then, like negotiating safety stock, you can use this predictability to negotiate lower costs per unit and ultimately increase your gross profits. To do this, give your suppliers visibility into your long-term purchasing plan (such as by sharing your 吃瓜黑料-generated demand forecasts). To seal the deal, you might need to commit to a minimum number of purchase orders with this partner.

Just make sure to keep your supplier in the loop with what鈥檚 happening with your upcoming purchase orders once they commit to a lower price. This will ensure that the relationship stays healthy and might even give you leverage to negotiate even lower costs per unit in the future.

Another way to lower your costs per unit is by reducing the related variable costs. For example, would your landed costs be cheaper if you:

• Switched providers?
• Opted for sea freight instead of air?
• Exclusively worked with one provider?

Likewise, you can reduce your storage costs by partnering with a storage solution like听 that pairs you with unused warehouse space. Then, get rid of excess amount of inventory (AKA, maintain optimal stock levels), so you鈥檙e only paying for the storage space you actually need.

You can further reduce the freight and storage space you use (and therefore pay for) by rethinking your听product packaging design.

For example, a few years back, IKEA started packaging the base and seat of their best-selling Jules Office Chair in two separate boxes. And as a result, they鈥檝e听听on storage space and landed costs.

Order cycle time

Of the 15 inventory management KPIs on this list, improving order cycle time might be the most important. That鈥檚 because the longer a customer waits to get their order, the more frustrating it is for everyone involved.

So, look for a third-party logistics (3PL) provider that distributes your inventory across several fulfillment centers.

For example, ShipBob does this for DTC brands worldwide, then fulfills their ecommerce orders from whichever fulfillment center is closest to the customer. This way, they can cost-effectively provide 2-day express shipping while cutting costs.

However, even with the most cutting-edge 3PL solution, order cycle time isn鈥檛 always an exact science.

For example, say you advertise 2-day shipping. But there鈥檚听, so it鈥檚 actually taking closer to a week to get products to customers.

Chances are good that you鈥檙e going to aggravate lots of customers when you fail to deliver on your promise鈥揺ven if it鈥檚 out of your control.

In these scenarios, a tool like听 can help you understand what your order cycle time period actually looks like and ensure consistency.

Say, for whatever reason, it鈥檚 taking longer to deliver goods than usual. Then, Capabl will let you know, so you can properly and proactively set expectations with customers.

This won鈥檛 necessarily lower your order cycle time in the short term. But it can help alleviate potential problems.

Plus, constantly monitoring this metric helps you keep a pulse on the customer experience. This will let you know if you deliver or exceed what you promise customers.

Or if you consistently fall short (even if it鈥檚 just for 1% of all customer orders), you鈥檒l know to rethink your 3PL or what you鈥檙e promising customers.

Make improving your KPIs easier

Historically, improving these inventory management KPIs meant guessing what action you should take. It was time-consuming, labor-intensive, and needlessly complex. But not anymore.

Today, 吃瓜黑料 and ShipBob make it easy to create a single source of truth. One where you can get the real-time insights you need to make short-term lifts and implement forward-thinking initiatives that鈥檒l unlock growth.

ShipBob is a tech-empowered 3PL that streamlines how ecommerce brands fulfill orders and manage logistics. With it, you can easily view your most important inventory KPIs, inefficiencies and fulfillment metrics in a real-time dashboard.

Couple this with an ops optimization tool like 吃瓜黑料, and what you get is a proactive operational plan that鈥檒l unlock revenue growth.

With Cogys, turn ShipBob鈥檚 data reports into:

• Optimized POs (all you have to do is check and submit) with automatic replenish alerts.
• Demand forecast accuracy using real-time inventory levels听and past trends.
• Sustainable operational plans to hit your most audacious revenue goals (with the power to effortlessly pivot when needed).
• The ability to sell on backorder when stockouts occur, so you never miss a sale.

Best part? 吃瓜黑料鈥檚 seamless ShipBob integration creates one powerful source of truth. That way, you can track all your inventory management KPIs. And more importantly, know exactly how to leverage those insights to improve your operations and grow your brand.

But don’t take our word for it 鈥� .