Inventory KPI: How to Align Your Company Wide Measurements

4 min read

Tags: Blog, Inventory management, Purchasing & replenishment

Daniel Fritsch   December 11 2014


How to Align Company Wide Measurements

Index

  1. Let’s look at an example of a typical supply chain dilemma
  2. The conflict of the inventory KPI
  3. There are three primary metrics all departments should be measured on to align the inventory KPI

Does it always seem like leadership, finance, operations and sales are on different pages of the same book when it comes to managing your inventory key performance indicators? Many organizations have departmental breakdowns when it comes to defining operational success, which can lead to unnecessary costs, diminishing profits and disgruntled customers.

Let’s look at an example of a typical supply chain dilemma

  1. The inventory planning manager is compensated based on having low quantities of finished goods in inventory. He likes low inventory in the warehouses, because management is happy with the reduction in capital costs. Lower inventory levels means higher cash on hand for the business. Good for the organization, right?
  2. On the other hand we have the sales manager who wants to always have product available in the warehouse so when customers purchase any array of products, inventory is available for immediate fulfillment. She is compensated on selling more product, which is the force behind the company’s revenue growth. Increased sales and higher product turnover, good for the organization, right?
  3. Then we have the production manager who gets a bonus based on operational efficiency. The production manager likes long stable production runs resulting in lowering the unit cost by increasing the overall equipment efficiency and man power utilization. The production manager is focused on ensuring finished goods are plentiful in the warehouses to ensure product availability for sales, even if this means carrying excess inventory in stock. Lots of safety stock on hand to support demand variability, good for the organization, right?

The conflict of the inventory KPI

The competing performance measurements across the organization result in the production manager disregarding short production cycles to produces excess stock to get his utilization up. The inventory manager won’t accept the goods at the warehouse because he doesn’t want finished goods inventory piling up and inflating his carrying and holding costs.

Inventory gets stored at the plant or in trailers off site as a result, which over time leads to product degradation and sunk costs due to spoiled goods. The sales manager inks a big deal but the stock is not available at the warehouse, so it gets expedited from another plant or an off-site location risking the loss of the sale and inflating the costs associated with the deal, hurting already narrow profit margins.

The bottom line is everyone in the supply chain hits their target inventory KPI goals but the supply chain is anything but efficient. So, how can an organization actually fix this problem?

There are three primary metrics all departments should be measured on to align the inventory KPI

1. Set Target Service Levels For Each Item:

Profitable distributors have the ability to set strategic target service rate for all products in the company’s supply chain. Some products will be fast movers (A), some will have moderate demand (B) and some are slower moving and erratic (C). Setting of target service levels ensures that sales has the right number of units to support sales activity, operations will only carry what is needed to fulfill sales orders and manufacturing has a specific production minimum and maximum to target.

The end result is that customers are happy because they receive timely and accurate delivery of goods, while costs can be predictably managed by the business. That will keep management and finance happy, too!

2. Lower Unhealthy Inventory Levels:

It is key to understand that every product in production will go through a product life cycle. From birth to maturity to death, a product’s demand will change over time, which will also effect how much of that product should be carried by the business. Excess inventory is one of the biggest culprits of diminishing returns on investment.

 

Inventory KPI graph for optimization
Reducing obsolete and excess stock frees up capital and saves carrying costs

Luckily, there are systems, like EazyStock, that automatically calculate the stages of item level product life cycles for inventory managers, so they can more intelligently align inventory levels and the inventory KPI with actual customer demand. Imagine increasing your stock health levels and reducing excess stock by upwards of 30%! It is possible with EazyStock.

3. Automate Your Reordering Process:

You’re probably thinking, “I don’t need help reordering stock or inventory KPI. My inventory management system does that for me.” Most inventory management systems today will support the reordering of inventory, but often times the replenishment process is far from accurate. Inaccurate replenishment can quickly lead to high levels of excess stock, which in turn raises capital tied up in stock.

This is one of the fastest ways to get management’s attention…and not in a good way. The trick is to supplement your existing ERP system with an advanced tool that can automatically track product life cycles and predetermined safety stock parameters to ensure replenishment is actually is in step with the company’s demand forecasts.

Software solutions, like EazyStock, are powerful, low cost additions to any ERP system. EazyStock will automatically calculate your inventory KPI’s, so you can actively follow your service level, capital tied up in the stock, safety stock and inventory replenishment requirements.

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