Your First Few Metrics for Inventory Management
Whether you’re a company that assembles parts to provide a finished product to the market or you’re a re-seller of finished goods, inventory is involved. While some might view inventory as just “items on the shelf,” I invite you to think about it a different way.
Precious cash was used to buy inventory, and until the inventory sells, the items on the shelf are cash locked away that a business can’t touch. Therefore, inventory management is very important and several key metrics will help you begin a journey into the healthy management of inventory.
Just the Right Amount
Every company that carries inventory wants to have enough to be able to fill customers’ orders but have a minimum amount of cash tied up on the shelf. Unfortunately, one half of that statement wants you to stock more items and the other half wants you to stock less items. You need… just the right amount.
The challenge is in attempting to determine what “just the right amount” is because conditions constantly change. Inventory management is not a one-a-year activity. It’s an ongoing process of monitoring changes in sales volume patterns (trends, seasonality, changes in consumer preferences), price changes, supplier performance and sometimes commodity price indices.
Your First Few Metrics
If you’re an established, global business, there are probably at least 30-50 metrics that you follow in procurement and supply chain and you likely have dozens of procurement professionals on staff. If you’re a smaller company, you’re lucky if you have one full-time professional running your procurement and inventory management. For that reason, smaller companies need to start with a focus on just a few key metrics. Here are a few of my favourites:
DSI (Days sales inventory): How many days does it take to sell through your inventory?
Cost of inventory as a percent of sales
Line items shipped (or filled) complete
A histogram of supplier delivery times vs. their promised time in their contract.
The first two metrics measure cash management related to inventory. Most businesses fail due to cash flow issues. The third item measures a portion of the customer experience. What percentage of the time did your customers receive all of what they ordered when they expected it? Each of these metrics can be broken down per item to determine whether there is a subset of items that are hampering your inventory management success.
The fourth measures supplier performance. A histogram chart can be created for each supplier showing the range of delivery times you are experiencing with each one. A reference line should be drawn at the delivery time that was promised in a supplier’s contract to see how they perform against their promise. In smaller companies, supplier contracts may not exist, but you can create reference lines based on verbal promises. The key point here is that you are looking to determine whether the delivery performance you are receiving is working well enough for you to fill customer orders most of the time, i.e., within your defined customer service levels.
Getting Your Data in Order
As with many impactful data projects, you may find that the data required for these metrics is stored in different data systems or different tables within a certain database. Much of the work to produce the suggested metrics is in getting the data in a form that can be analyzed. That’s step 1.
Step 2 is in the creation of dashboards and data visualizations to make it easy for people to use the charts and tables created. Establishing a real-time data connection to keep the data up-to-date is preferable. However, in many cases, that’s not possible. An excellent alternative is to have a scheduled data refresh that is as automated as possible.
Getting to Business Value
The final challenge is in learning how to interpret the dashboard information for practical business use. It is valuable to have someone who has a broad understanding of business decisions and data analysis to help maximize the value of the dashboard tool created.
Tracey Smith is a recognized analytics expert, speaker and author. She is the President of Numerical Insights LLC, a boutique analytics firm addressing the needs of businesses large and small. If you would like to learn more, please visit www.numericalinsights.com or contact Tracey Smith through LinkedIn.