You’d be surprised how difficult agreeing on organizational formulas for BI can be.

One of the most heated arguments in my professional career was the definition of “Inventory Turnover.” Some wanted a rolling window, and some wanted annual averages. It was nuts.

It highlighted that we assume something has an obvious, industry-accepted standard, but a room full of professionals will, I hope, pull figurative knives out over it and defend their position aggressively.

This is why inventory metrics and KPIs like Inventory Turnover are often part of a data dictionary—not just where the data lives but also how it should be employed and incorporated into reporting.

Let’s examine some best practices for inventory metrics before calculating Inventory Turnover and some of the other common values.

Inventory metrics must have standards

It can be tempting just to start generating insights. The problem is that reporting creates incredible ‘technical debt’ in the business. It can be the quickest way to create ‘camps’ around sources of truth. 

The struggle becomes about who’s right – who’s more accurate – rather than managing and improving the business.

Creating up-front consensus on inventory metrics is hard, but it’ll save you pain later trying to reconcile reports with the same metric reached in different ways. A cross-functional team with any interest in inventory is needed. You don’t want to do this multiple times.

Here are some things to address:

Standard units of measure

Are you concerned with units or dollars?  Are you concerned about days or weeks?  Whatever it is, set it and stick to it.  Your goal is to have all reports with the same metric – inventory, sales, ratios – presented similarly.  If the inventory count is in units, it should be that way on all inventory count reports.  It shouldn’t shift to pallets or dollars between views.  Confusion hinders sharing intelligence.

Include/exclude

Does something matter to the calculation? Some things could be misleading. When I worked in outdoor gear, one tent was very different from 10,000 lures. If working in dollars, that tent’s value is more than the lures, and the inverse is true when working in units. So, a discussion of applying floors—or ceilings—on price, dimensions, and other inventory metrics is important to avoid skewing departments, stores, or facilities.

Standards of time

What units of time are going to be used? When does a week start? When do months or the fiscal year begin? It might sound simple, but some will choose the calendar month. Some will choose a rotating cycle of 4-5 weeks. It’s essential to align reporting to the standard set by the company. Often, this is pushed down by the Accounting team; consistency eliminates confusion.

Start measuring

Once you’ve agreed on standards, it’s time to consider the various dimensions of inventory.  

Many views are too simple, and you should consider how inventory can be analyzed. This is important for two reasons: 

  1. Inventory is not static. It’s a flowing dynamic value around receipts and dispositions.
  2. It’s also your company’s largest investment after people.

Here are some major areas you should be reporting on:

Calculating Inventory Turns

Inventory Turn is a standard metric representing how well you sell through stock.  

There is no universal target number for this. A big-box retailer targets 7 to 8, even 10 Inventory Turns for predictable fast movers. A luxury retailer is OK with three turns due to high margins. Reference your business model and industry to determine what ‘good’ looks like. Also, different product lines within the business will have different standards for Inventory Turns.

Standard is (annual sales) / (average on-hand inventory)

On Hand vs. Available to Promise (ATP)

Just because you can see it doesn’t mean you can sell it. Modern e-commerce allocation means you can touch 5, but 2 may already be committed to sales or retail replenishment. Report on both owned and saleable inventory.

Standard is (units on hand) + (units to be received within SLA window) – (units allocated)

Days/Weeks of Supply

This is a practical and highly debated calculation. The simplest form is Units on Hand/Average Sales for the period. Complex form: Is it average daily over the year, over the quarter, or over a rolling window? Do you include calendar or business days? Standards matter here. This is the primary driver of a sawtooth chart’s trigger or reorder point.

The Standard is (ATP) / (Average Sales for Time Period)

In Stock Percent

In Stock Percent is optionally used by warehouses with rigid planograms and inventory budgets or 3PLs providing client feedback. How many shelf positions are empty vs. how many were planned? These can be binary empty slots over planned; they can also be units or dollars. In Stock Percentage is often used as a canary in the coal mine for lost sales.

The Standard is (SKUs with Inventory > 0) / (SKUs Planned) as a percent.

There are as many inventory metrics to report on as the business can conceive. However, these are the standard ones you should use to manage the business.

Publish and action

You’ve got consensus, you’ve got measures. As the old phrase says, now manage.

One of the largest gaps experienced in all industries is how to use inventory analytics. It’s not enough to create a report that everyone agrees on. It’s not about who’s right but what’s working for the business. 

Don’t just consider out-of-stocks; have mitigation reviews and actions. When you see unsellable inventory creep up, have a housecleaning SOP to get it sold, returned, or written off.

It can seem obvious, but more measurements fail not because of their accuracy but because of driving quantifiable results for the business. Make sure your teams know this isn’t just FYI. Otherwise, all these efforts are wheel spinning.

Deposco makes inventory metrics simple

An integrated WMS that combines planning and execution can manage this natively, so you won’t have to worry about how formulas should be applied.