KPIs for Warehouse and Inventory management
20 Feb 2020
What is KPI? KPI stands for Key Performance Indicator. Here you can learn about warehouse KPIs, how they are calculated and how they can help you in managing your warehouses.
Carrying cost of inventory
What do you understand by saying carrying the cost of inventory? It simply means the sum of the cost of capital tied up in inventory, cost of utilities, insurance, taxes, cost of obsolescence.
This KPI shows how much it will cost to hold the inventory and how much profit will bring over a period of time. It’s no secret the longer you keep your inventory in your warehouse the more it will cost you. Thus you should do everything to have a quantifiable amount of stock. It is so important for managing your warehouses and making decisions on buying and demand forecasting.
Lete’s list three main reasons for this KPI:
Keep track of expenses
Accurate calculation of profit
Increase business efficiency
The formula is:
Inventory carrying cost=(Storage costs+depreciation costs+employee salaries+opportunity costs)/Total Value of annual inventory
Inventory turnover ratio
The second KPI you should take into consideration is the Inventory Turnover Ratio. This KPI is too important for your warehousing. It shows how quickly your inventory is sold and shipped in your storage. In short, it simply shows the frequency at which you can sell your stock. The faster you sell your stock the less it will cost you and the more profit you can get. It’s a fantastic opportunity to get greater insight into the popularity of an item to measure future buying practices. It enables you to understand if a certain item isn’t moving and you should invest inventory reduction strategies.
Usually, inventory management platforms show these metrics, but there is a special formula for it:
Inventory turnover ratio=Cost of goods sold/Average inventory
Rate of return
The third KPI is the Rate of return. It is another important warehouse management KPI. As soon as it shows how often you receive returned items.
It’s a good method to evaluate customers’ satisfaction level and understand certain reasons for it. It enables warehouse managers to overview the reasons and eliminate them. Just imagine one of the main reasons it is getting not the ordered item. It is because of not proper picking processes.
This KPI shows the percentage of returned orders. It is calculated via this formula:
Rate of Return=returned units/sold units
Consequently, you should try to keep this KPI as low as you can, because it directly impacts your customers’ satisfaction level. Of course, it’s an undeniable fact that the number of returned items is growing higher and higher.
The next KPI is a very important factor in forecasting success. It refers to the backorder rate.
If your backorder rate is too high it means you get many orders for a certain item that isn’t in stock. Surely it can be a reason for unexpectedly increased demand, but in any case, a high backorder rate speaks about not proper planning and forecasting.
If such problems occur you should immediately improve forecasting processes and get lower backorder rates.
BAckorder rate KPI keeps shows the number of delayed orders due to stockouts and the percentage of orders that cannot be filled at the time of order placing.
The formula is:
Backorder rate=orders unfulfilled at the time of purchase/total orders
Order lead time
Order lead time is another warehouse management KPI. that feeds into the backorder rate. It is the time between the order is placed and the order is received.
The higher your order lead time, the lower your customers’ satisfaction level is. Moreover, if the order’s quality satisfies your customers too, it will impact your order cycle time too. Order cycle time shows the time between the placing of one order and the next order.