When you run a retail business, metrics aren’t just numbers – they’re key to making smart decisions that drive growth and boost profits.
Metrics are especially important when it comes to effectively managing your inventory. They help you avoid overstock and stockouts, optimize stock levels and ultimately increase your bottom line.
In our recent Inventory Masterclass, How to Master Performance: KPIs for Optimal Inventory Health, our panel of retail experts – including retail consultant Alison Metcalfe, Lori Boyer from EasyPost, Trevor Martin, from SNOW and EJ Ekhato from Inventory Planner by Sage – debated which inventory-related KPIs are most powerful and most useful.
From inventory accuracy to segmentation and benchmarking, this jam-packed session covered it all. The on-demand recording is available now – it really is worth catching up with this one.
In the meantime, here’s the rundown on the five inventory KPIs that matter most to retail businesses, according to our experts.
1. Lost Sales Ratio
Lost sales ratio shows the percentage of potential sales a business loses due to stockouts. It highlights the importance of having enough stock to meet customer demand.
A high lost sales ratio indicates that a business may need to improve its inventory management processes.
How to work this out: Lost sales ratio = (number of lost sales x total sales) x 100
2. Inventory Holding Cost
This metric summarizes the costs associated with storing goods, including insurance, warehousing, and storage. It offers vital insights into the financial impact of holding excess inventory.
How to work this out: Inventory Holding Cost = (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory
3. Inventory Turnover Ratio
The inventory turnover ratio is a metric that shows how quickly a business is selling its inventory. A high turnover ratio indicates efficient inventory management and faster cash flow.
⚠️ Spoiler alert: Inventory Turnover Ratio was the metric Trevor Martin, VP of Operations at $100M oral cosmetics brand SNOW, included in his must-have KPIs. Catch up with the full webinar to hear more on what he had to say.
How to work this out: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
4. Days/Weeks on Hand
This metric measures how quickly a business sells through its average inventory on hand. It helps businesses understand how rapidly their inventory is moving.
A lower number of days or weeks on hand indicates that a business is selling its inventory quickly.
How to work this out: Days/Weeks on Hand = (Average Inventory Value / Cost of Goods Sold) x 7 or 365
5. Gross Margin Return on Investment (GMROI)
This metric calculates how much money a business makes for every dollar spent on inventory. It highlights the profitability of your inventory investments.
The higher the GMROI, the better the business is performing.
How to work this out: Gross Margin Return on Investment = Gross Margin / Average Inventory Investment
🎥 Watch the complete webinar on-demand
Register now for a free recording of the session to hear exactly what our experts had to say about the KPIs that have the most impact.