22 Feb Metrics for Effective Inventory Planning
Ensuring you minimise stock-holding costs can result in massive warehouse savings. But it means carefully balancing stock so that the right amounts, of the right products, are in stock at the right time.
Using a set of metrics can help you to understand if you’re achieving a well-balanced and efficient level of stock in your warehouse. Here’s the metrics we recommend for effective inventory planning.
The Carrying Cost of Inventory
This inventory planning metric measures the costs of storing stock over a certain period of time.
Every piece of stock bought and placed in storage has a cost associated with it. For example, there’s the staff costs to move and check it, plus insurance, physical costs of storage and freight costs when it’s moved. Using the carrying cost of inventory metric allows you to work out how much profit can be made on your current stock. It can also help your suppliers to map out their production cycles.
The calculation is for the carrying cost of inventory is:
Stock Carrying Rate x Average Stock Value
On-hand accuracy is an inventory planning metric that shows how accurate your knowledge of your stock is. It checks how well the SKU and actual physical count in a particular location matches the data you have in your system. To develop and maintain on-hand accuracy, it’s best to undertake a regular programme of cycle counts.
Stock Turns / Stock Turnover
One of the most commonly used supply chain metrics, stock turnover shows how many times your stock or turns over per year.
A frequently used method to calculate is to divide the annual cost of sales by the average stock level.
Or, you can use stock turns in a rolling manner, to give a moving number. For example, say your rolling 12 month cost of sales is £16m and your current stock value is £4m, then:
£16m / £4m = 4 stock turns
Stock Carrying Rate
The stock carrying rate is a more complex inventory planning calculation. It is:
(Annual stock costs / Average Stock Value, expressed as a percentage) + Other costs as a percentage
It’s best to give an example to explain this calculation.
First, you need to add up your annual stock costs. Include storage, handling, obsolescence, damage, admin and loss (due to theft and so on).
£800,000 – storage
£400,000 – handling
£600,000 – obsolescence
£800,000 – damage
£600,000 – admin costs
£200,000 = theft / other loss
TOTAL = £3,400,000
Then, say your average stock value is £34,000, when you divide the annual stock costs by the average stock value, you get 10%, as follows:
£3,400,000 / £34,000k = 10%
Next, you need to add up your costs.
9% – the Opportunity Cost of Capital, that is, the return you might expect to gain if you used the money tied up in your capital elsewhere
4% – insurance
6% – taxes
TOTAL = 19%
Finally, you add the two percentage totals together:
10% (stock costs) + 19% (other costs ) = 29%
Thus, your Stock Carrying Rate is 29%.
Line Count Fill Rate
Line Count Fill Rate is a Fill Rate metric for inventory planning. There are many different Fill Rates and associated calculations. Broadly speaking, Fill Rates measure the service level between two parties. In the main, they demonstrate how good shipping performance is and the rates are expressed as a percentage of the total order.
Line Count Fill Rate measures the number of order lines sent on the initial shipment against the number of lines ordered. In addition, it can sometimes take into account the requested delivery date. Here’s the calculation:
Number of Order Lines Shipped on the Initial Order* / Total Number of Order Lines Ordered
For example, Sprocket & Co. orders ten products, with one order line each on its purchase order number 1234. The manufacturer ships out six line items on 1st February and the remaining four products on 10th February. The Line Count Fill Rate for this particular purchase order is therefore 60% (6/10 = 60%) as it is calculated when the first shipment is made
SKU Fill Rate
This metric shows the number of SKUs ordered and shipped. Before, with Line Count Fill Rate, you look at each order line, and assess each line as being of equal value. But with SKU Fill Rate, you count the SKUs per order line. The calculation is:
Number of SKUs Shipped on the Initial Shipment / Total Number of SKUs Ordered
For example, line 1 has an order for 30 SKUs of product XYZ. Line 2 has an order for 10 SKUs of item ABC. If line one is shipped on 1st May and line 2 on 2nd May, then the SKU Fill Rate is 75% (30/40 = 75%).
On-Time Shipping Performance
On-Time Shipping Performance measures the number of order lines shipped on or before the requested shipping date versus the total number of order lines. It shows how capable you are of meeting customer demand as far as the requested delivery date is concerned.
Order lines shipped on time / total number of order lines
Stock Months of Supply
Stock Months of Supply shows the number of months of supply that a warehouse has, assuming no new stock will be received. It is measured thus:
Stock On-Hand / Average Monthly Usage [the yearly forecast divided by 12]
How Do Your Inventory Metrics Measure Up?
Companies that plan, forecast, plan, and optimise their stock well are known to be more efficient. They hold at least 15% less inventory, have 17% better “perfect order” ratings, and have 35% shorter cash-to-cash cycle times. There are obviously many factors that affect overall financial performance, but research frequently shows that it’s great customer service that is the differentiating feature. And excellent customer service is all about delivering that perfect order. Companies that achieve this tend to have higher earnings per share (EPS), a better return on assets (ROA) and greater profit margins.
Using advanced inventory planning and optimisation software – like the Valogix – can manage your valuable stock assets. Using it will realise the best results and the best return on your stock investment. For more information on Valogix, call us on 020 8819 9071 or send us a message.