Inventory management objectives: defining your KPIs

Want to make managing inventory more efficient? Explore specific, measurable and achievable KPIs to get you there.



Every business needs key performance indicators (KPIs). They're a fundamental part of tracking progress, tracking finances and making decisions driven by data. And that goes for every business, including those that focus on inventory management.

So, what makes a good KPI? And how do you define it?

In truth, KPIs aren't so different from New Year's resolutions.

We've all made New Year's resolutions and not kept them – and typically, it's because our resolutions weren't specific enough, measurable enough or actionable enough.

To take one example, "get fit" is a bad New Year's resolution because it's too vague to act on and too big to measure. By contrast, "go to the gym once a week" is a resolution that you can track and possibly even achieve.

KPIs, whether in inventory management or any other aspect of business, are similar. They need to be specific, measurable and actionable. That way, you get a strong sense of the progress your business is making.

Not only this, but KPIs also provide accountability. If you've got a specific goal in mind, you can allocate resources and personnel effectively. If you fall short of your goal, you know who to talk to.

That's the long and short of why KPIs are important for inventory management. But how do you define them? Let's take a closer look.

How to define your KPIs for inventory management

When defining your KPIs for inventory management, you first need to identify your strategic objectives. These are the long-term goals that your KPIs are there to help achieve.

A strategic objective might be that you want to increase your revenue within a set period. It could be that you want to reduce the number of picking mistakes, late deliveries or customer service calls.

Once you've identified your strategic objectives, you need to set your goals. Many businesses use the so-called "SMART" framework. This stands for:

• Specific
• Measurable
• Achievable
• Relevant
• Time-bound
• 
  

That "T" for "time-bound" is important. If you give yourself an indefinite amount of time, you're less likely to hit your target. Setting realistic limits makes your goals more specific, more measurable and more achievable.

It can also be a good idea to limit the number of your KPIs. Too many objectives can mean overstretching your resources. Agreeing on a handful of goals, by contrast, can lead to more concrete results – and a greater sense of satisfaction in your team.

Once you've decided on your KPIs, it's time to decide how to measure them. It can be useful to think of these in terms of questions and metrics.

From one point of view, a KPI is a question in need of an answer. Let's say you want to reduce the number of customer service calls. The question "By how many?" needs a concrete answer.

In the case of customer service calls, the metric will be the number of calls – nice and easy. But other KPIs call for other and, in some cases, more complicated metrics.

There are plenty of metrics to choose from: ROI, handle time, inventory turnover and email click-through rate, to take just four common examples.

Once you've defined your KPIs and your metrics, it's time to assign responsibility for achieving them. This apportioning of accountability is essential for the successful running of a business.

As well as giving staff a clear sense of their role and responsibilities, accountability puts a stop to time-consuming buck-passing down the line.

Finally, you need to put measures in place to review your KPIs regularly. Circumstances change, and you need to have the flexibility to change with them.

It can be a good idea to diarise these reviews. This puts you in a position where you're acting proactively, not reactively.

What kinds of inventory management KPIs are there?

There are many different kinds of inventory management KPIs out there. Here are five of the most common.

1. Optimising stock levels

Overstocking is a waste of money and under-stocking lets the customer down. Your KPI could be to achieve a particular level of stock to be checked at agreed-upon intervals.

2. Reduce carry costs

Storing, insuring and managing unsold inventory costs money. You could aim to reduce these costs, whether by working with a third-party organisation, rethinking your use of warehouse space or changing insurer.

3. Improving order fulfilment

As a manager, you have many concerns. The customer, however, has only one: getting what they ordered on time and in good condition. This is why one of the most common inventory management KPIs is to ensure accurate and timely deliveries.

4. Improve your forecast accuracy

Forecasting the amount of inventory you'll need isn't easy – but it's far from impossible. A common KPI in inventory management is to set a target for the allowable amount of excess inventory at a given time.

5. Gross margin return on investment

Gross margin return on investment (GMROI) measures the profitability of your inventory. You arrive at this figure by calculating the amount of gross profit earned for every pound invested in your inventory.

Improving your GMROI score is a common KPI for businesses that manage inventory as a core part of their operations.

How can a warehouse management system help with defining KPIs?

A good cloud-based warehouse management system (WMS) is all about visibility. It lets you see the amount, status and location of all your inventory at any time of day.

This end-to-end visibility makes it easier than ever to identify room for improvement and set meaningful KPIs.

On top of this, a WMS lets you generate data analytics with just a few clicks of the mouse – so when it's time to measure your KPIs, there's no disruption to your day-to-day business.

Are you looking for a highly capable, cloud-based inventory management system to unlock operational efficiencies in your warehouse? At Minster WMS, we build warehouse management solutions with robust stock management and reporting systems built in. Contact our UK team today to book a demo and see our capabilities first-hand.