How To Monitor Supply Chain Inventory Health:  4 Essential KPIs

How To Monitor Supply Chain Inventory Health:  4 Essential KPIs

Is your supply chain as healthy as you think? While many businesses rely on gut instinct or limited data to manage their inventory, failing to monitor the right key performance indicators (KPIs) can lead to costly inefficiencies and missed opportunities. In fact, studies show that supply chains driven by data-backed insights outperform their competitors in both service and efficiency.

In this post, we explore four critical inventory health KPIs that can help you transform your operations: from On-Time Delivery to Inventory to Sales Ratio,  and Carrying Cost of Inventory, and Purchase Order Tracking. By adopting real-time visibility and advanced analytics, you can unlock improvements in efficiency, reduce waste, and enhance customer satisfaction. Ready to sharpen your supply chain and boost your bottom line?

Key Takeaways:

• Track On-Time Delivery: Focus on improving the OTIF metric, which measures whether products are delivered on time and in full, as this directly impacts customer satisfaction and operational efficiency.
• Monitor the Inventory to Sales Ratio: Keep a close eye on this metric to gauge inventory health, ensuring that stock levels align with sales trends to avoid overstocking or understocking.
• Manage Carrying Costs Effectively: Reducing carrying costs can significantly improve profitability. Focus on maintaining a high inventory turnover ratio and eliminating waste by optimizing warehouse space and operations.
• Leverage Purchase Order Tracking: Real-time tracking of purchase orders allows you to identify and address potential disruptions before they affect supply chain efficiency, leading to improved inventory visibility and accuracy.
• Integrate Advanced Analytics: Use predictive analytics and real-time visibility platforms to forecast demand more accurately and prevent obsolete inventory from accumulating, ensuring you only stock what is needed.
• Focus on Inventory Visibility: Real-time insights into your inventory health are crucial for identifying bottlenecks, improving lead times, and reducing excess inventory.
• Streamline Replenishment Strategies: Adjust replenishment policies to reflect real-time demand signals. Ensuring stock levels match customer needs helps reduce the risk of stockouts and overstocking, making your supply chain more resilient.
• Optimize for Supply Chain Resilience: Invest in data-driven decision-making and real-time performance monitoring to improve overall supply chain health. This ensures you’re always prepared for unforeseen disruptions and can adapt swiftly.
• Manage Obsolete Inventory Proactively: Develop strategies for handling obsolete stock, including remarketing, bundling, or liquidating slow-moving products, to free up space and reduce financial loss.

Key Metrics and KPIs for Monitoring Supply Chain Inventory Health

Understanding Supply Chain Metrics
Supply chain metrics and KPIs are crucial indicators that track the efficiency, speed, and accuracy with which orders are fulfilled and goods are delivered to customers. These metrics serve as a barometer for assessing how effectively your organisation is meeting its goals and enhancing operational performance. By employing a comprehensive suite of inventory metrics, businesses can gain a holistic view of their supply chain’s health.

While each metric provides valuable insights, they are most effective when used collectively to present a comprehensive picture of your business’s supply chain processes. Relying on a single metric might not capture the full scope of productivity or inefficiencies within your operations. Given the diverse nature of industries, it is imperative to identify and focus on the supply chain inventory KPIs that are most relevant to your specific sector.

The Importance of Supply Chain Metrics and KPIs
Recent studies underscore that organisations leveraging data-driven insights tend to outperform their peers over time, particularly in strategic decision-making. This principle is equally applicable to supply chain health, where metrics and KPIs play a pivotal role. They provide a transparent view of your operations, helping to pinpoint pain points and strengths, thus facilitating the necessary adjustments for improvement. Here are key reasons why these metrics are indispensable:

• Identification of Strengths and Weaknesses: Supply chain operations can be fine-tuned by recognising areas of excellence and those needing improvement.
• Real-time monitoring: This provides immediate performance assessments, enabling swift responses to any emerging issues.
• Enhanced Decision-Making: Precise and concise data, KPIs empower leaders to make informed decisions that are grounded in evidence.
• Increased Inventory Accuracy: Accurate metrics help reduce waste and optimise resource allocation.
• Elevated Customer Satisfaction: Improved order fulfilment speed and precision translate into higher customer satisfaction levels.

KPI #1 – On-Time Delivery and Accurate ETAs

Ensuring “on-time delivery” to the point of shipment is critical in maintaining operational efficiency and meeting customer expectations. As manufacturing production schedules tighten, achieving precise delivery times requires robust processes and good coordination. A delay in delivering products to the shipment stage can disrupt downstream activities.

The OTIF (On Time, In Full) metric stands as a fundamental supply chain inventory KPI. Simply put, customers expect products to be provided at agreed dates and provided at agreed dates and times. The challenge lies in maintaining cost efficiency while ensuring that customer inventory requirements are met. Achieving the promised quantity of goods within the agreed timeframes is essential. Mastering the OTIF metric is often regarded as the cornerstone of supply chain efficiency.

KPI #2 – Inventory to Sales Ratio (ISR)

As any accountant will confirm, inventory represents capital in stasis. The Inventory to Sales Ratio (ISR) evaluates the average inventory value over a set period against net sales for the same duration. This metric, often used in balance sheet analysis, is part of a suite of metrics that illuminate the state of your inventory health management. Other pertinent metrics include:

• Days Inventory Outstanding: The average number of days inventory is held before sale.
• Inventory Turnover Ratio: Indicates how frequently inventory is sold and replenished over a given period.

An increase in ISR might suggest that inventory investments are expanding faster than sales, or conversely, that sales are declining. A decrease indicates a reduction in inventory relative to sales or a growth in sales.

By integrating these inventory metrics into your strategic framework, you can enhance supply chain inventory KPIs, ensuring robust supply chain health and achieving sustained business success.

KPI #3 – Carrying Cost of Inventory

To determine inventory carrying costs, first add up the expenses outlined above – capital, storage, labor, transportation, insurance, taxes, administrative, depreciation, obsolescent, shrinking – over one year. Then divide those carrying costs by total inventory value and multiply the number by 100 for a percentage.

• Inventory carrying rate x Average inventory value

Every inventory acquisition entails associated costs—labour, insurance, warehousing, and freight being prime examples. This inventory metric proves instrumental in determining the profitability potential of your current stock. Key success indicators include maintaining low carrying costs and achieving a high inventory turnover ratio.

Precision in inventory health management is paramount. Enhanced inventory accuracy positively impacts logistics metrics. By improving inventory visibility, and thus accuracy, you not only curtail inventory carrying costs and mitigate stock outages but also refine logistics processes, encompassing the receipt of inbound goods and order processing comprehensively.

KPI #4 – Purchase Order Tracking

Tracking the status of your orders is indispensable for preemptive identification of potential supply chain disruptions. This set of metrics should take precedence on the supply chain KPI dashboard of any real-time visibility platform.

This tool not only tracks order dates and statuses but also integrates information regarding inventory accuracy, as previously discussed.

Tim Richardson
Development Director
Iter Consulting