“It’s impossible to talk about supply chain without mentioning inventory.”
These were the words of Dr. Closs, my Supply Chain professor at Michigan State University—and I couldn’t agree more.
In this article, I will break down 12 critical inventory metrics, covering:
– Why each metric matters
– The most common challenges
– Actionable strategies to overcome these challenges
1. On-Time In-Full (OTIF)
Why It’s Important:
For many babies, the first word they say is Mama. In supply chain, it’s OTIF.
OTIF measures how many orders are delivered on time and in full.
It is a critical KPI in retailer compliance.
Many large retailers—Walmart included—penalize suppliers for poor OTIF performance.
A low OTIF can lead to damaged relationships, lost sales, and reduced shelf space.
Common Challenge:
Many companies struggle with OTIF because of carrier delays, stock shortages, or demand volatility.
Even a single disruption in the supply chain can throw off entire order commitments.
How to Improve:
– Have reliable carriers and build transportation redundancy
– Implement real-time tracking to spot delays early and take corrective action before they escalate.
– Enhance demand forecasting to ensure the right stock is available at the right time
2. Order Fill Rate
Why It’s Important:
A high fill rate means customers are getting exactly what they ordered, leading to stronger relationships and fewer lost sales.
Common Challenge:
Many companies experience low fill rates because of inaccurate demand planning, production delays, or insufficient safety stock.
How to Improve:
- Improve demand forecasting accuracy by analyzing historical sales trends and cross-functional collaboration
- Keep safety stock for fast-moving SKUs to prevent shortages
- Work with suppliers to reduce replenishment delays
3. Inventory Days of Supply
Why It’s Important:
This metric shows how many days inventory will last based on current sales. Maintaining the right level helps prevent both excess stock and stockouts.
Common Challenge:
Holding too much inventory increases storage costs and traps cash, while too little creates shortages.
How to Improve:
- Use real-time demand forecasting to adjust inventory levels proactively
- Optimize reorder points based on sales velocity and lead times
4. Days of Forecast Cover
Why It’s Important:
This metric measures how many days of future demand can be met with current inventory. It’s crucial for preventing stockouts or excess inventory.
Common Challenge:
This is a ‘do not use’ metric if forecast accuracy is poor. In that situation, it is better to analyze history.
How to Improve:
- Leverage AI-driven/ machine learning forecasting tools for more accurate predictions
- Improve cross-functional alignment
5. Inventory Turnover
Why It’s Important:
A higher turnover indicates that products are moving quickly, while a lower turnover suggests inventory is sitting too long, increasing the risk of obsolescence.
Common Challenge:
Slow-moving stock ties up capital and may result in expired or outdated products.
How to Improve:
- Together with Sales, run targeted promotions to clear slow-moving inventory
- Reduce order quantities for slow-moving SKUs to prevent excess buildup
6. Average Inventory
Why It’s Important:
Average inventory helps companies determine how much stock they typically hold, which impacts storage costs and cash flow.
Common Challenge:
Excess inventory leads to higher warehousing costs and an increased risk of write-offs.
How to Improve:
- Adopt just-in-time (JIT) inventory practices to minimize excess stock, when possible
- Use automated replenishment systems to keep stock levels optimized
7. Inventory Accuracy
Why It’s Important:
If inventory records don’t match what’s physically in stock, businesses risk stockouts, lost sales, and operational inefficiencies.
Common Challenge:
Discrepancies often occur due to shrinkage, miscounts, or theft.
How to Improve:
- Conduct regular cycle counts to maintain accuracy
- Use RFID or barcode scanning for better tracking
8. Inventory to Sales Ratio
Why It’s Important:
This is one of my favorite metrics. It helps businesses balance inventory levels relative to actual sales, preventing overstocking or understocking.
Common Challenge:
High ratios indicate excess stock, while low ratios suggest potential stockouts.
How to Improve:
- Analyze sales trends to adjust inventory levels accordingly
- Improve supply chain agility to replenish stock faster
9. Stockout Value
Why It’s Important:
Stockouts result in lost revenue and frustrated customers, often driving them to competitors.
Common Challenge:
Underestimating demand leads to frequent stock shortages. These lost sales are invisible in the financial statements.
How to Improve:
- Monitor real-time inventory levels to prevent shortages
- Adjust safety stock for high-demand items
10. Cost of Goods Sold (COGS) Ratio
Why It’s Important:
A high COGS ratio reduces profitability, making it harder to maintain healthy margins.
Common Challenge:
Inefficient procurement and high production costs eat into profits.
How to Improve:
- Negotiate better supplier contracts to reduce raw material costs.
- Improve manufacturing efficiency to cut waste.
11. Near Expiry Inventory
Why It’s Important:
Managing near-expiry inventory prevents waste and costly write-offs, especially for perishable goods.
Common Challenge:
Poor stock rotation leads to excess expired goods.
How to Improve:
- Use FIFO inventory management to move older stock first
- Run promotions on products nearing expiration
12. Write-Offs
Why It’s Important:
Write-offs represent financial losses from unsellable inventory, hurting profitability.
Common Challenge:
High write-offs indicate poor demand planning and warehouse mismanagement.
How to Improve:
- Improve demand forecasting to reduce excess stock
- Use markdown strategies before items expire
Tracking and improving these 12 inventory metrics is essential for maintaining a resilient and profitable supply chain.
