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Essential Inventory KPIs Every Business Should Track


Why KPIs Matter


You can't improve what you don't measure. These 7 KPIs tell you if your inventory management is working.


KPI #1: Inventory Turnover Rate


What it is:

How many times per year you sell and replace your entire inventory.


Formula:

Turnover = Cost of Goods Sold (COGS) / Average Inventory Value


Example:

  • Annual COGS: $500,000
  • Average inventory value: $50,000
  • Turnover = 10×/year

    • What's good:

  • Retail: 5-10×/year
  • Restaurants: 12-24×/year (perishables)
  • E-commerce: 6-12×/year

    • Too low = Cash tied up in slow-moving stock

    Too high = Risk of stockouts


    KPI #2: Stockout Rate


    What it is:

    % of time a product is unavailable when a customer wants to buy it.


    Formula:

    Stockout Rate = (Days Out of Stock / Total Days) × 100


    Example:

  • Product was out of stock 15 days in a 90-day quarter
  • Stockout rate = 16.7%

    • What's good:

  • <5% is excellent
  • 5-10% is acceptable
  • >10% is costing you sales

    • Impact:

    For a business with $50K/month revenue, a 10% stockout rate = $5,000/month in lost sales ($60K/year).


    KPI #3: Carrying Cost


    What it is:

    Total cost of holding inventory (storage, insurance, spoilage, opportunity cost).


    Formula:

    Carrying Cost = (Storage + Insurance + Spoilage + Opportunity Cost) / Average Inventory Value


    Example:

  • Storage: $500/month
  • Insurance: $100/month
  • Spoilage: $300/month (perishables)
  • Opportunity cost: $200/month (cash tied up)
  • Average inventory value: $30,000

    • Carrying Cost = ($1,100 × 12) / $30,000 = 44% per year


    What's good:

  • 20-30% is typical
  • <20% is excellent
  • >40% means you're holding too much inventory

    • KPI #4: Order Accuracy


    What it is:

    % of orders received with correct items and quantities.


    Formula:

    Order Accuracy = (Correct Orders / Total Orders) × 100


    Example:

  • 95 out of 100 orders received correctly
  • Order accuracy = 95%

    • What's good:

  • >98% is excellent
  • 95-98% is acceptable
  • <95% means supplier quality issues

    • Impact:

    Low accuracy = wasted time on returns, re-orders, and customer complaints.


    KPI #5: Days of Inventory on Hand (DOH)


    What it is:

    How many days of sales you have in current inventory.


    Formula:

    DOH = (Current Inventory Value / COGS) × 365


    Example:

  • Current inventory: $40,000
  • Annual COGS: $480,000
  • DOH = ($40,000 / $480,000) × 365 = 30 days

    • What's good:

  • Retail: 30-60 days
  • Restaurants: 7-14 days (perishables)
  • E-commerce: 45-90 days

    • Too low = Risk of stockouts

    Too high = Cash tied up unnecessarily


    KPI #6: Gross Margin Return on Investment (GMROI)


    What it is:

    How much gross profit you earn for every dollar invested in inventory.


    Formula:

    GMROI = Gross Margin / Average Inventory Cost


    Example:

  • Gross margin: $200,000/year
  • Average inventory cost: $50,000
  • GMROI = 4

    • Interpretation:

    For every $1 in inventory, you earn $4 in gross profit.


    What's good:

  • >3 is excellent
  • 2-3 is good
  • <2 means inventory isn't profitable enough

    • KPI #7: Backorder Rate


    What it is:

    % of orders you can't fulfill immediately due to stockouts.


    Formula:

    Backorder Rate = (Backordered Units / Total Units Ordered) × 100


    Example:

  • 50 units backordered
  • 1,000 units total ordered
  • Backorder rate = 5%

    • What's good:

  • <2% is excellent
  • 2-5% is acceptable
  • >5% means serious supply chain issues

    • Impact:

    High backorder rates = lost sales (customers cancel) + customer frustration.


    How to Track These KPIs


    Manual (Spreadsheet):

  • Export sales data from POS
  • Track inventory counts manually
  • Calculate monthly

    • Automated (Software):

  • Stokkfy calculates all 7 KPIs automatically
  • Real-time dashboard
  • Alerts when KPIs go out of range

    • Monthly KPI Review Checklist


    □ Inventory turnover: Is it within target range?

    □ Stockout rate: Any products consistently out of stock?

    □ Carrying cost: Are we holding too much inventory?

    □ Order accuracy: Any supplier quality issues?

    □ DOH: Do we have too many or too few days of stock?

    □ GMROI: Which products are most/least profitable?

    □ Backorder rate: Are we fulfilling orders on time?


    Taking Action on KPIs


    If turnover is too low:

  • Run promotions on slow-moving products
  • Reduce order quantities
  • Discontinue dead stock

    • If stockout rate is too high:

  • Increase reorder points
  • Reduce lead times (find faster suppliers)
  • Add safety stock for high-demand products

    • If carrying cost is too high:

  • Reduce inventory levels
  • Negotiate better supplier terms (consignment, JIT delivery)
  • Improve demand forecasting

    • Summary


    The 7 essential inventory KPIs:

    1. Inventory turnover (sales / inventory value)

    2. Stockout rate (% of time out of stock)

    3. Carrying cost (% of inventory value)

    4. Order accuracy (% of correct deliveries)

    5. Days of inventory on hand (days of sales in stock)

    6. GMROI (profit per $ of inventory)

    7. Backorder rate (% of unfulfilled orders)


    Track these monthly. Improve 1-2 at a time. Your business will become more profitable and less stressful.


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