How to build a KPI dashboard for inventory management

As an eCommerce entrepreneur, all your focus is on sales, your customers, and your product range. While stock management may not be top of your list of priorities, good stock management can improve your cash and profit when you make it a part of your day to day routine.

Get the right KPIs

It’s likely that you already have a good understanding of your inventory  carrying costs. Keep track of the invoices and look out for areas where you can reduce the payable amount. Look into negotiating better contracts or improve your internal processes in stock handling and ordering.

However, some issues are not directly visible in this accounting approach. To get visibility into the capital locked up in inventory and avoidable costs caused by incorrect stock levels, you need to design the right tools to make the potential issues visible and improvements measurable.

From a high level perspective you want to fulfill all customers orders, at lowest cost and lowest inventory. With these 3 core KPIs, you will track the overall performance of your supply chain. However, when it comes to breaking this down into operational and measurable KPIs, there is no single solution that fits all. The right choice of KPIs depend on your business strategy and what you want to focus on. You have to set up your individual dashboard and choose the right KPIs. Picking the right KPIs to track has an incredible impact on your success and initiate actions to improve your supply chain performance.

Keep an eye on the details

The KPI dashboard will take a high level perspective, but the crucial insights will always come on the item level. At the end of the day, stock management always done on the item level, measuring Stock Keeping Unit (SKU) by SKU. After all, when you’re negotiating with your suppliers, you’ll be looking at the order quantities of individual SKUs. 

What to focus on?

Before getting into the individual KPIs, it is helpful to group them by the direction of where an action need to be taken to improve the performance. The KPI dashboard will cover the following three groups:

  • Customer centric: How you perform in your customer’s eye
  • Supplier centric: How your suppliers are performing
  • Internal view: Gauging your internal processes

In the eye of the customer

The customer centric KPIs measure how the customer perceives your service. Are you a reliable distributor or supplier to them? How responsive are you? The most widely used KPIs are

  • Fill rate: How many order have you been able to fulfill immediately out of your stock
  • Back order: How many orders where you not able to fulfill immediately?
  • Other potential KPIs:
    • Order lead time - how long must your customer wait?
    • Overdue orders that will be fully shipped but not in time.
    • Order accuracy where failure results in returned or not-paid deliveries, customer complains about wrong quantity, quality, location or timing etc.

Supplier Assessment

The supplier assessment is a complete topic on its own and it is crucial to your own performance as distributor or wholesaler. When you’re trying to figure out which suppliers are contributing most to your business, you should set up a supplier assessment tool that combines information from several sources. One very important assessment is the quality of their services. You can use this for internal improvements, but also for the negotiation with them. Having a comprehensive track record of your suppliers will enable you assess their performance, and this puts you in a stronger position for the next negotiation round. Common supplier KPIs are all about measuring the reliability of the supplier’s delivery like:

  • Supplier Accuracy
  • Receiving Accuracy
  • Other potential KPIs:
    Categorize and record quality issues. Track the actions you have taken to solve the quality issues: did you return them, request rebate, or did you accept the deviation, because it was not essential to your business?

The most important thing for you is to assess the suppliers and watching out for any deterioration of the quality of their service and the  products. Even if the deviations are minor, you should track them. You may find out that certain suppliers are deviating only slightly but consistently from your requests. Even if you can handle these deviations, it is an additional effort and should be avoided. Ideally, you should have a penalty scheme in place. In any case, you can use these quality lapses in the next negotiation round.

Internal Operational Performance

Finally there is the 3rd set of KPIs that measures your internal performance. Even if your customers are completely happy with your 100% fill rate and all your suppliers deliver with perfect precision, your internal process and organization can result in profits or losses without affecting your customers or suppliers. For a start, looking at the amount of capital locked-up in your inventory and how long you keep your stock in the warehouse before it is sold can make a difference to your business. Typical examples are:

  • Inventory value
  • Inventory turnover
  • Carrying cost
  • Stock outs: the reason for stock-outs can be caused by an unanticipated high demand, delivery mistake or internal false assessment to reorder.
  • Other potential KPIs:
    • Excess stock, stock you hold longer than your average stock keeping period, for whatever reason. First you need to define the maximum stock you want to hold for each SKU. Any amount above this threshold is excess stock that is locking up your capital.
    • Expected days to sell inventory: Make the inventory turnover KPIs more tangible and forward looking: Divide the stock value at market price by the daily sales forecast. This way you get a pretty good understanding how the stock levels relate to your sales expectation. Based on a reliable sales forecast, you can easily spot excess stock where you need to take action and SKUs that are selling out.

After deciding on the KPIs for your business, you need to review these regularly and schedule deep dives into individual SKUs and suppliers. By being proactive, you’ll be able to stay ahead of the issues instead of only reacting to inventory issues when they occur.

About the Author:

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Thorsten Ohm is a cofounder of Waypoint Ventures. He has  20 years of international experiences spanning across many geographies, where he has set-up organisations and developed businesses. As a senior corporate executive and a board member he is experienced in growing businesses organically and via M&A. Waypoint Ventures helps companies to accelerate their growth, improve their performance, and enter new businesses or markets.


See also:
What is healthy inventory management?
3 SKU best practices to get your inventory sorted
6 ways cloud inventory management simplifies how you sell