How to calculate Inventory Metrics and why is it important to distribution companies?
Inventory metrics are a set of quantifiable measures used to evaluate the performance of a company's inventory management and to determine the overall health of its inventory. Calculating these metrics helps organizations identify areas for improvement and make informed decisions about their inventory levels and management strategies.
Here are some common inventory metrics and how they are calculated:
- Inventory Turnover: This metric measures how many times a company's inventory is sold and replaced over a given period. It is calculated as:
Inventory Turnover = Cost of Goods Sold / Average Inventory
- Days Sales of Inventory (DSI): This metric measures how long it takes for a company to sell its entire inventory. It is calculated as:
DSI = 365 days / Inventory Turnover
- Gross Margin Return on Investment (GMROI): This metric measures the return a company generates on its inventory investment, taking into account both the cost of the goods and the profit margin. It is calculated as:
GMROI = Gross Margin / Average Inventory
- Stockout Rate: This metric measures the frequency with which a company experiences stockouts, or a lack of inventory to meet customer demand. It is calculated as:
Stockout Rate = Number of Stockouts / Total Number of Orders
Why is it important to calculate inventory metrics?
- Better decision making: By having a clear understanding of inventory metrics, companies can make informed decisions about their inventory levels, such as when to reorder, how much to order, and what to stock.
- Improved customer satisfaction: By keeping a handle on inventory metrics, companies can ensure that they have enough stock to meet customer demand, leading to improved customer satisfaction.
- Better inventory management: Inventory metrics provide companies with a clear understanding of their inventory performance and help identify areas for improvement, leading to better inventory management.
- Cost savings: By optimizing inventory levels, companies can reduce carrying costs and minimize waste, leading to cost savings.
- Improved profitability: By having a better understanding of inventory metrics, companies can make better decisions about inventory management, leading to improved profitability.
By leveraging these capabilities,
About the Author
Executive sales expert with 30+ years of accounting background and deep understanding of business processes as they relate to lite manufacturing, distribution, specialty retail and hospitality. During this time, I have focused on building “Clients for Life!”