Inventory Metrics for Distribution: Why & How You Need to Measure Your Inventory Performance

Inventory management is the wild west of distribution. From sprawling warehouses, work teams and equipment to stock counts, inventory optimization, and logistics, everything must work together perfectly for inventory management to be successful. If anything falls out of place, you risk losing valuable time, resources, and reputation.

Inventory managers must overcome a variety of challenges, including:

• Increased customer expectations around speed, accuracy and flexibility
• Unpredictable demand
• Lack of visibility into what’s on the shelves across branches and distribution centers
• Inefficient location of that inventory because of the lack of visibility
• Packing/shipping errors
• Stockouts
• Unreliable lead times

With so many moving pieces, business leaders must be able to see inventory insights in real-time and make data-driven decisions based on key performance metrics.

Why Is Tracking Inventory Metrics So Important?

Tracking inventory metrics allows distributors to see everything happening within their organization and make adjustments to optimize efficiencies, accuracy and customer satisfaction.

For instance, you can monitor inventory shrinkage (the number of items you should have but don’t) throughout the year and determine whether inconsistencies are from damage, theft or simply human error.

Distributors who don’t consistently track the inventory metrics—or who focus on the wrong ones—may find themselves bleeding profits without knowing why problems occur or how to fix them.

Unfortunately, outdated tracking methods, data siloes, and low visibility make things more complicated than they need to be. Instead, it is crucial to:

• define what inventory metrics are important to your business
• find the right technology solution to support you, so that you can quickly see, trust and act on the data

What Inventory Metrics Should You Be Tracking?

Start your journey by defining what inventory metrics are most meaningful to your business. For instance, you may prioritize warehouse management and pay close attention to Time to Receive (how quickly employees prepare items for shipment) and Put Away Time (how quickly employees store inventory).

On the other hand, you may want to focus more on fulfillment and keep a close eye on your Perfect Order Rate (the number of items delivered with no problems) and returns.

There are dozens of key inventory metrics a distributor can track to improve operations. Here are a few examples:

Inventory Turnover (By Category)

Inventory turnover measures how often inventory is sold and leaves the warehouse over a certain period (such as every quarter or year). Ideally, you’re monitoring turnover by category, parsing the data to see how well your A, B, and C items are selling. Then, you can identify dead or slow-moving stock and make adjustments.

Lost Orders

When was the last time an item or order seemingly vanished into thin air? Lost orders (often resulting from a stockout or human error) can be costly, especially when dealing with high-value items. Tracking this number will give you great insight into where those miscues are happening and to mitigate them going forward.

Rate of Return (Return on Investment)

Are you earning a good return on your inventory investments? Calculating your rate of return (return on investment) is crucial in determining whether and where your business is most profitable and what you can do to improve margins.

Visibility into Product Performance

How well are your items selling? Tracking product performance provides insight into which items are selling well and which are sitting on shelves collecting dust. It may also illuminate areas of opportunity to expand in a product category.

Average Days to Sell

This metric measures how long it takes for your company to turn its inventory into sales. In other words, this is the average time your cash is tied up in inventory. Optimizing days to sell will allow you to avoid overstocking and maintain more cash on hand.

Forecast Accuracy

Customer demand can change on a dime. Accurate demand forecasting is crucial to stocking the right items at the right time. The right ERP solution such as Microsoft Dynamics 365 Finance and Supply Chain Management will analyze historical sales patterns and make recommendations. Make data-driven decisions about what items to stock and in what quantity, saving money and boosting long-term profitability.

Average Lead Time

How long does it take for your customers to receive their orders, from supplier to end-user? Unfortunately, modern supply chain constraints make it difficult to guarantee short lead times. Tracking this metric will help you see where improvements should be made, including how to optimize warehouse efficiencies, fulfillment and logistics.

What Software Should You Use to Track Inventory Metrics?

To track inventory metrics accurately, you need a robust software solution designed for distribution. The right software solution will combine data from across your business in a central dashboard. This unified source of information will allow you to see detailed insights into your warehouse, inventory, labor force, sales, and logistics.

Unfortunately, not all ERP solutions can handle the scale of data in B2B, especially when dealing with hundreds of thousands or millions of SKUs. Because of this, it’s important to find a solution that can support your scale.

Dynamics 365 Finance and Supply Chain Management combined with the power of Power BI are good places to start. Power BI is a business intelligence platform that offers invaluable insights and forecasts with customizable dashboards that update in real time, eliminating the need to put together cumbersome manual spreadsheets each time you want to review your stats.

To learn more about Microsoft’s solutions or how tracking inventory metrics can enhance your organization, contact one of our technology specialists and schedule a consultation.