The success of your online store hinges on the efficiency of your inventory management. If you accidentally run out of stock, repeatedly send out orders late, or have shelves filled with unsellable products, you run the risk of damaging your store’s reputation and performance.
Learn how to track key inventory management metrics to improve your inventory efficiency and deliver outstanding customer service. Better yet, you’ll gain greater insight into the financial performance of your inventory operations. You’ll know which processes need work so you can make changes that scale your eCommerce store to success.
Why you need to track inventory management metrics
Inventory management is an irreplaceable component of any eCommerce business. If you manage stock and process orders, you need to have a handle on your inventory operations.
From holding enough stock to keep up with demand to understanding inventory costs and shipment quality, tracking key inventory management metrics reveals valuable information about your store’s performance.
Measuring inventory management key performance indicators (KPIs) will help you understand what changes need to be made to achieve your eCommerce goals, like:
- Reducing inventory costs
- Improving shipment times and quality
- Minimizing your returns rate
- Optimizing product sales
- Deciding which product lines to scale or shrink
Track the right metrics to bring you closer to your eCommerce goals.
Different types of inventory management metrics
Inventory management KPIs tend to fall into one of four categories:
These categories inevitably experience some overlap, with certain metrics able to provide helpful information to improve several business operations. For example, your lost sales ratio could be beneficial to both sales and operational divisions in your business.
Track the metrics that align with your current business goals but keep a broad view so you also observe other performance indicators.
If you’re focused on improving sales performance, analyzing sales KPIs alone will only take you so far. You also need to consider operational KPIs that may impact customer orders and warehousing KPIs that delve into customer satisfaction.
Whatever your goals are, look at the big picture by measuring inventory performance across relevant sales, warehouse, operational, and employee KPIs.
Which inventory management metrics to track (and how)
Tracking the right inventory management metrics will help move the needle forward in your eCommerce business. Below, we’ve shared some of the key metrics you need to monitor across sales, warehouse, operational, and employee KPIs and how to measure them.
Concerning inventory management, sales KPIs tell you how customer orders impact your inventory. You can use this data to understand the sales performance of individual products, product categories, or your overall stock.
Inventory turnover rate
Inventory turnover measures the rate at which stock is sold or used in a given time period. This rate is usually measured on an annual basis, letting you know how much stock you’ve gone through in a year.
To track inventory turnover rate, divide your average inventory levels for a given time period by the total cost of goods sold. This formula will return the average inventory rate as a ratio to account for the fluctuations in seasonal performance.
Inventory turnover rate = (Average inventory / Cost of goods sold)
Average inventory is calculated as the total stock at the beginning of a selected time period plus the total stock at the end of that same period, divided by two:
Average inventory = (Beginning inventory + Ending inventory) / 2
Measure your inventory turnover to see how your stock levels compare to inventory sales performance. A high turnover rate might indicate a high number of sales, or it could suggest you have insufficient inventory levels to keep up with consumer demand.
Meanwhile, a low inventory turnover rate could indicate either poor sales performance or that you have too much stock and not enough demand.
Stock-to-sales ratio is the amount of inventory held in warehousing by the number of sales being made.
Calculate this rate by dividing the average inventory value by the net sales value:
Stock-to-sales ratio = (Average inventory values / Net sales value)
Keep an eye on your stock-to-sales ratio to see when stock resources are depleting. It can show you when inventory needs replenishing to ensure uninterrupted sales operations. You’ll be able to maintain healthy inventory levels and avoid having too much or too little stock.
Sell-through rate tells you how much inventory has been sold compared to how much has been received from suppliers.
Determine your sell-through rate using the following formula:
Sell-through rate = (# units sold / # units received) x 100
Your sell-through rate acts as a strong indication of supply chain efficiency. You can use this metric to monitor sales, adjust targets, and ensure you aren’t holding more stock than you can realistically sell.
Weeks on hand
The formula for weeks on hand reveals the average amount of time (weeks, in this case) it takes to sell the inventory you currently hold. You can replace weeks with days if you want a more granular view of your inventory’s sales performance.
One way to calculate weeks on hand is by dividing the average inventory for the annual accounting period by the cost of goods sold and multiplying the quotient by 52:
Weeks on hand = (Average inventory / Cost of goods sold) x 52
Weeks (or days) on hand offers a glimpse into the performance of your inventory. A high number of weeks on hand indicates stock is moving slowly. Meanwhile, fewer weeks suggest the stock is moving at an optimal rate.
The backorder rate measures how many orders couldn’t be fulfilled at the time they were placed. It’s presented as a percentage of total orders during a measured time period.
Backorders typically occur due to a retailer not having the requested products in stock at the time a customer places an order. For example, if a customer orders a set of bedside tables, but only one is in stock, their order may be placed on backorder until the warehouse receives stock of the bedside tables so they can fulfill the entire purchase.
Backorder rate = (# delayed orders due to backorders / total # of orders placed) x 100
A backorder rate should raise alarm bells if it signifies too many customers have to wait for their order to be fulfilled. A high rate could impact customer satisfaction and retention, damaging your future sales performance. You can rectify a high backorder rate by readjusting minimum inventory thresholds for in-demand products.
Revenue per unit
The revenue per unit KPI shows how much you earn from one unit of inventory. You may see average revenue per unit abbreviated as “ARPU.”
While this metric is commonly used for subscription-based businesses, it’s also a great way to determine which products are your biggest earners on an individual basis.
To calculate your ARPU, divide the total revenue by the total number of units sold in a given time period:
Revenue per unit = (Total revenue / Total units sold)
If your eCommerce store has a subscription model or offers products on a membership basis, you need to track revenue per unit.
This will provide accurate insight into the performance of individual SKUs and help you optimize your pricing strategy to boost profitability.
It can also help you identify new growth opportunities by revealing which products generate the most revenue and which don’t.
Cost per unit
While revenue per unit shows how much each unit of inventory is worth, cost per unit tells you how much is being spent on each unit of inventory.
Cost per unit takes both the fixed costs and the variable costs incurred during the production or procurement process.
Calculate cost per unit by adding the total fixed costs and the total variable costs together, then dividing this by the number of units produced:
Cost per unit = (Total fixed costs + Total variable costs) / # units produced
This metric is most helpful for eCommerce stores that sell a lot of the same product. It reveals which products are the most expensive and lets you see where costs are being incurred so you can make intelligent cuts.
You can also identify any changes to costs over time or spot trends as they emerge. For instance, if a product experiences a spike in cost per unit, it might be a sign that you need to find a new manufacturer with lower prices, cut back on packaging costs, or increase production efficiency, to name a few factors that can influence cost per unit.
Warehouse KPIs are also known as receiving KPIs because they typically focus on inventory coming into the warehouse. Tracking warehouse KPIs can improve inventory management efficiency by highlighting weak spots in your inventory receiving processes.
Time to receive
The time to receive metric reports the rate at which new inventory is received and prepared for sale.
Time to receive = Total time taken for received stock to be approved + Booked into inventory + Ready for sale
Monitoring the time to receive inventory helps you understand how long it takes to receive stock and get it ready to sell. If time to receive is slower than expected, this could be an indication of shortfalls within your inventory management process.
With this metric, you can quickly address any bottlenecks preventing stock from being made available for purchase fast enough.
Put away time
Put away time refers to how long it takes inventory to be moved from the receiving stone into a storage location. With that said, the put away process involves more than simply moving inventory from point A to point B; it also involves:
- Efficient transportation of inventory
- Optimal use of storage space
- Optimal placement of inventory in the warehouse
- Documenting the inventory storage and updating all connected software
- Ensuring the safety of inventory, resources, and warehouse employees
The formula for calculating put away time relies on the fulfillment of the above processes.
Put away time = Total time taken to put received stock into its storage location
Keeping a close eye on put away time will allow you to spot any inefficient processes that need refining.
The returns rate monitors how many shipped orders are returned.
To calculate the rate of returns, divide the total number of returned items by the total number of shipped items:
Returns rate = (# of returned items / # of shipped items)
Tracking your returns rate can highlight defective products, poor-quality shipment methods, or other issues that are causing returns. Use this metric to dig into which products are commonly returned and find out why so you can improve processes going forward.
Supplier quality index
The supplier quality index (SQI) measures the performance of suppliers on a weighted score across several important areas.
The categories measured in an SQI are:
- Material quality
- Corrective actions
- Prompt reply
- Quality system
- Commercial posture
- Process quality
Scores within each of these categories are then assigned a weight based on importance. How you calculate SQI will depend on your chosen eCommerce inventory KPIs. For example, if you prioritize product quality, you may give the material quality category a greater score weight on the index.
Here’s one example of how you could calculate supplier quality index:
Supplier quality index = (Material quality x 45%) + (Corrective actions x 10%) + (Prompt reply x 5%) + (Quality system x 15%) + (Commercial posture x 10%) + (Process quality x 15%)
This quality index highlights the strengths and weaknesses of each of your suppliers across multiple areas. Use the SQI to choose suppliers strategically based on your KPIs so you partner with the best supplier for your eCommerce needs.
Operational KPIs provide insight into how well your business is running. Warehouse KPIs and Operational KPIs tend to overlap, especially when looking at storage processes or facilities.
On-time orders rate
The on-time orders rate measures how often customers receive their orders on time.
When shipping orders to customers, you usually have a shipping window that notes the expected delivery time. This window may vary depending on the chosen shipping method.
For customers who order with next-day delivery, the expected delivery time would be one day. However, those who order through standard delivery can expect their package to arrive in four days or more. Anything delivered later than the expected delivery window is considered late.
Calculate this rate by dividing the total number of orders delivered on time by the total number of orders:
On-time orders rate = (# of orders delivered on time / # of orders)
This inventory management metric shows you the percentage of orders that are delivered within the expected time frame. A low on-time orders rate suggests delivery is slower than expected and could indicate poor customer service and logistics. Work on increasing your on-time orders rate to improve customer satisfaction.
Shrinkage displays the difference between the amount of inventory listed as being in stock versus the amount of inventory that’s actually in stock. This excess amount of listed stock could be due to clerical error, damaged goods, loss, or theft.
Measure shrinkage by subtracting the recorded inventory value by the value of the physically counted stock.
Shrinkage = (Recorded inventory value – Physically counted inventory value)
Counting shrinkage will prevent you from reporting inaccurate inventory levels. Shrinkage impacts profit: The higher the shrinkage percentage, the greater the hit to your profits. Keeping an eye on these levels will help you minimize the financial impact of inaccurate stock levels.
Measure shrinkage to try to identify where the discrepancy is taking place so you can amend your inventory management processes.
Lost sales ratio
The lost sales ratio monitors the difference between the average sales demand and actual sales.
It can be measured using multiple formulas. The easiest way to calculate the lost sales ratio is to focus on lost sales due to stockouts. Calculate this by dividing the number of days a product has been out of stock by the total number of days in the year, then multiply by 100.
Lost sales ratio = (# days product is out of stock / 365) x 100
A more accurate appraisal of lost sales would be to find the difference between daily stock and average daily sales when stock is lower than the average sales. Since lost sales ratio depends on product demand, seasonality can also cause this rate to fluctuate.
Research the various methods for calculating lost sales and use the formula best suited to your eCommerce store and inventory goals.
A high lost sales ratio suggests you need to increase your minimum product thresholds to reduce the risk of stockouts.
Perfect order rate
The perfect order rate KPI measures how many orders are shipped without any issues, inaccuracies, or delays. A score of 100% would mean your eCommerce store always ships orders flawlessly.
Measure the perfect order rate by calculating order performance across:
- Number of orders delivered on time
- Number of orders completed
- Number of orders delivered undamaged
- Number of orders delivered accurately
Divide each of the above metrics by the total number of orders delivered, then multiply by 100 to obtain your perfect order rate.
Perfect order rate = [(# orders delivered on time / # orders) x (# orders completed / # orders) x (# orders delivered undamaged / # orders) x (# orders delivered accurately / # orders)] x 100
Monitoring the perfect order rate gives you an insight into customer satisfaction and the efficiency of your picking, packing, and shipping processes. If your perfect order rate is lower than desired, find out which factor is depressing it and work on improving these processes.
The fill rate, or inventory fill rate, tracks the amount of inventory being used for customer orders as a percentage of total available inventory. Measuring the fill rate lets you see how well you meet customer demand.
To work out your fill rate, take the total number of items that have been shipped to customers and divide it by the total number of available items in inventory, then multiply by 100.
Fill rate = (# of shipped items / Total # items) x 100
A high inventory fill rate might suggest you’re stocking more products than you need. Overstocking products could be wasting money, so work on lowering your fill rate as a way to save money.
Order cycle time
Order cycle time (OCT) is also sometimes referred to as order timeliness because it measures the average time taken to fulfill a customer order. OCT monitors how long it takes an order to be fulfilled from the second it’s placed to when it ships.
You can calculate order cycle time by subtracting the time the customer received the order from the time they placed the order (in days) and dividing the result by the total number of orders shipped.
Order cycle time = (Order delivery date – Order date) / Total # orders shipped
Focus on reducing a long OCT by improving your warehouse flow, setting limits during the picking and packing process, or outsourcing fulfillment to an experienced third-party logistics (3PL) partner.
Average inventory refers to the amount of inventory you have on hand during a given time period. Understanding your average inventory can help you maintain consistent stock levels, avoiding overstocks or stockouts.
Measure average inventory by adding the beginning inventory for your chosen time period to the ending inventory for the same time period, then dividing by two.
Average inventory = (Beginning inventory + Ending inventory) / 2
Monitor average inventory throughout the year. Be mindful of high-demand periods and adjust minimal inventory levels accordingly.
Inventory carrying cost
The inventory carrying cost calculates the total cost of all expenses relating to inventory operations. It takes into account every related business expense from warehousing costs to salaries, financial costs, and inventory costs.
Other expenses calculated as part of the inventory carrying cost include:
- Warehouse rent
- Warehouse employee salaries
- Inventory software cost
- Inventory turnover
- Opportunity cost
- Costs caused by losses
- Shortage costs
Essentially, any monetary expenditure associated with holding inventory needs to be taken into account when calculating your inventory carrying cost.
An example formula for calculating inventory carrying costs could be:
Inventory carrying costs = [(Warehouse costs + Employee salaries + Loss and depreciation costs + Opportunity cost + Incidental costs + Overheads) / Total inventory value] x 100
Carefully monitoring your inventory carrying costs helps you map your cash flow. You can spot any financial problems early and discover opportunities for growth by seeing how much holding inventory is costing your business.
Calculating these costs also improves production planning and profitability by giving an in-depth view of individual expenses.
Dead stock, also known as spoilage, refers to inventory that’s unsellable. Stock can become “dead” due to damages, passed expiry dates, overproduction, or low customer demand.
This is not to be confused with the term “deadstock” which is sometimes used to reference discontinued product lines, such as sneakers, that sell at premium prices.
Calculate your dead stock percentage by dividing the amount of unsellable stock by the amount of available stock in a chosen time period, then multiply this quotient by 100.
Dead stock = (Amount of unsellable stock / Amount of available stock) x 100
Dead stock is a valuable inventory management metric for appraising the viability of your eCommerce business. A dead stock percentage of 25% or higher could indicate issues with your inventory, such as buying the wrong products, poor product quality, inaccurate forecasting, low customer demand, or something else.
Use your dead stock levels to dig deeper into the reason why stock isn’t selling and how to fix it.
Employee KPIs help you measure staff performance. These metrics can help you determine labor costs during inventory management. You can also use them to improve employee performance targets and understand how to support the growth, productivity, and performance of your team.
Labor cost per hour
Labor cost per hour deals with employee costs on an hourly basis.
You can calculate labor cost per hour by taking an employee’s annual gross salary and subtracting it by the total weeks that employee works in a year, then dividing this by the number of hours they work in a week.
Labor cost per hour = (Employee annual gross salary / # weeks employee works in a year) / # hours an employee works in a week
Tracking labor costs on an hourly basis will allow you to uncover opportunities to improve productivity and ensure labor costs are reflective of output.
For instance, if employees on the picking and packing line spend most of their time walking between inventory locations to source stock, you may consider moving the picking and packing station closer to inventory to reduce the labor cost per hour.
Labor cost per item
Labor cost per item, or unit labor cost, calculates how many hours of labor it takes to fulfill one inventory item.
Measure this cost by dividing the total number of units by the total labor expense. The total labor expense will vary by company but may cover employee salaries and the cost of moving products through the inventory and order fulfillment process.
Labor cost per item = (Total # units / Total labor expense)
Monitoring the labor cost per item shows you how efficiently employees fulfill individual items. You can also identify which items are most expensive to fulfill and find opportunities to reduce unit labor costs. Set a tolerance range for the labor cost per item and use this to improve inventory efficiency.
Wrapping up — Track key inventory management metrics to optimize performance
To improve the efficiency of your eCommerce store, make sure you track the right inventory management metrics.
Monitor sales, warehouse, operational, and employee KPIs to determine inventory management performance and pinpoint opportunities for improvement. Watching these inventory management KPIs is the best way to spot gaps in your eCommerce processes so you can strengthen inventory efficiency, customer satisfaction, and your store’s reputation.
Analyze your most valued KPIs to make data-driven decisions that fine-tune and expand your eCommerce store’s performance. These can include your inventory operations, online store performance, marketing strategy, or another avenue of your business — whichever wield the greatest influence over your success.
If you want to learn more about the value of eCommerce inventory management and how to implement best practices for seamless eCommerce operations, read my complete guide to eCommerce inventory management next.