The Ultimate Guide to Inventory Management KPIs: Definitions, Formulas, and Applications

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January 30, 2025
4 min read
The Ultimate Guide to Inventory Management KPIs: Definitions, Formulas, and Applications

In today’s dynamic business environment, measuring and optimising inventory management key performance indicators (KPIs) is essential for staying competitive. To provide insights into these critical metrics, AGR conducted a survey asking customers to identify the KPIs they will prioritize in 2025. From service levels to sustainability, the results show a clear focus on balancing operational efficiency with customer satisfaction and environmental concerns.

This guide breaks down the most important inventory management KPIs, their definitions, how to calculate them, and practical applications for your business.

1. Inventory Turnover Ratio

Definition

Measures how often a company’s inventory is sold and replaced over a given period.

Formula

The Ultimate Guide to Inventory Management KPIs: Definitions, Formulas, and Applications

Application

A high inventory turnover ratio indicates efficient inventory management and strong sales. To apply this KPI effectively, categorize your inventory based on demand patterns and shelf life. Regularly analyse slow-moving stock and consider promotional activities or discounts to clear stagnant items. Additionally, review purchasing patterns to avoid overstocking.

2. Days Sales of Inventory (DSI)

Definition

Indicates the average number of days it takes to sell inventory.

Formula

The Ultimate Guide to Inventory Management KPIs: Definitions, Formulas, and Applications

Application

Reducing DSI improves cash flow and reduces holding costs. Focus on demand forecasting and inventory planning to achieve this. Implement just-in-time (JIT) strategies and adopt advanced demand planning tools to minimize excess inventory. Regularly review and optimise replenishment cycles.

3. Inventory Accuracy

Definition

Measures how closely the recorded inventory matches the actual stock.

Formula

The Ultimate Guide to Inventory Management KPIs: Definitions, Formulas, and Applications

Application

Conduct regular cycle counts and full physical inventories to maintain high accuracy. Invest in automated inventory tracking systems, such as RFID or barcode scanning, to reduce manual errors. Train staff on accurate data entry and stock management processes.

4. Supplier Performance

Definition

Evaluates the reliability and efficiency of suppliers.

Key Metrics to Track

  • On-time delivery rate
  • Order accuracy
  • Lead time variance

Application

Develop a robust supplier management strategy that includes regular performance reviews. Establish key performance benchmarks and collaborate with suppliers to address performance gaps. Use scorecards to monitor and evaluate supplier performance. Build long-term partnerships with high-performing suppliers.

5. Stockout Rate

Definition

The percentage of customer orders that cannot be fulfilled due to insufficient stock.

Formula

The Ultimate Guide to Inventory Management KPIs: Definitions, Formulas, and Applications

Application

Preventing stockouts is critical for maintaining customer satisfaction. Implement demand forecasting models and safety stock strategies. Utilize automated alerts for low inventory levels and optimise reorder points based on historical sales data and seasonal trends.

6. Service Level

Definition

Measures the ability to meet customer demand without stockouts.

Formula

The Ultimate Guide to Inventory Management KPIs: Definitions, Formulas, and Applications

Application

Achieving high service levels requires a balance between inventory investment and customer satisfaction. Segment products by demand priority and ensure high service levels for critical items. Monitor order fulfillment processes and address bottlenecks promptly.

7. Supply Chain Sustainability

Definition

Assesses the environmental and social impact of supply chain operations.

Key Metrics to Track

  • Carbon emissions
  • Waste reduction
  • Sustainable sourcing practices

Application

Ensure your sustainability initiatives align with corporate social responsibility (CSR) reporting requirements and green accounting frameworks. This alignment is increasingly crucial for securing loans and meeting regulatory compliance. Monitor and report on sustainability KPIs to demonstrate your commitment to responsible supply chain management

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8. Overstock Levels

Definition

Measures the amount of excess inventory held beyond optimal levels.

Formula

The Ultimate Guide to Inventory Management KPIs: Definitions, Formulas, and Applications

Application

Reducing overstock levels can significantly lower storage costs and minimize waste. This aligns with AGR customers’ focus on cost efficiency.

Conclusion

Tracking and optimising these KPIs will help businesses navigate the challenges of 2025, from long lead times to sustainability concerns. AGR empowers its customers with tools such as dashboards and advanced analytics via Microsoft Power BI to monitor and improve their KPIs.

By prioritizing the right metrics, businesses can enhance their supply chain visibility, strengthen supplier relationships, and achieve their strategic goals.

Ready to take your supply chain strategy to the next level? Download Trends you need to know in 2025 supply chain management today to gain deeper insights into:

  • The top supply chain trends shaping the future.
  • Expert recommendations for improving KPI performance.
  • Actionable strategies for overcoming industry challenges, from sustainability to supplier relationships.
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