Warehouse and inventory management are two of the most important aspects of running a product-based business. They involve a great deal of calculated decision-making on the part of the warehouse manager, and handled well, they contribute to an organized warehouse operation.
To optimize your warehouse operations, we’ve standardized some key metrics that managers around the world use to understand their inventory. This blog discusses some of these metrics and how they can be calculated.
The inventory carrying cost refers to the total cost required to maintain inventory over a given period of time. While there are many classifications of inventory costs, such as receiving cost, storage cost, and packing cost, carrying cost is important because it tells you how much it costs to keep your inventory at desired levels.
Carrying Cost (%) = Inventory Holding Sum / Total Value of Inventory x 100
Here, inventory holding sum comprises four components of carrying cost. They are:
The formula to calculate the holding sum is as follows:
Inventory Holding Sum = Inventory Service Cost + Inventory Risk Cost + Capital Cost + Storage Cost
You’ll want to keep the carrying cost percentage as low as possible. The higher the percentage, the smaller the profit margins and greater the chance of a fiscal burden.
Returned products cost time and money to process. Understanding why products are returned can help you solve issues early. The Rate of Return (RoR) is the metric that helps you understand how many products you deliver are returned. The formula to calculate the RoR is
Products Returned / Total Products Delivered = Rate of Return
The RoR can be calculated for subcategories of your product so you can begin to understand not only what is returned but why. For instance, you might respond differently to the return of a defective product than to one that was incorrectly delivered.
Click here to read more about how to keep your products flowing smoothly in and out of your warehouse.
Inventory turnover is the speed with which you sell and replace all of your inventory. This is important to track because you need to have enough product on hand to meet demand, but you don’t want so much inventory that all of your money is tied up in a product that might not sell.
The formula for calculating inventory turnover is
Cost of Goods Sold / Average Inventory = Inventory Turnover
When you have a high inventory turnover, you have a small amount of inventory on hand at a given time. A low inventory turnover means you are keeping product in your warehouse.
Along with inventory turnover, the days in inventory metric helps you determine how fast your inventory is replaced. Days in inventory tells you the average number of days that you have your products on the shelf.
The formula for days in inventory is
365 days
_______________ = Days in Inventory
Inventory Turnover
More efficient warehouse management systems will keep products for fewer days.
Orders picked per hour is a simple but extremely important metric for inventory management. It gives you insights into the hourly productivity levels of your inventory personnel and helps you make data-driven decisions.
Based on the results obtained for various shifts, you can determine how to boost efficiency in your warehouse. For example, you might make changes in team management or overall organizational structure.
Another great use of this metric is that it allows you to calculate the impact of introducing a new technology or picking technique. By recording the productivity before and after the introduction, you can determine how effective the change has been.
Calculating these metrics manually could be a daunting task. This is especially true if you have a small or medium-sized business.
By investing in inventory management software, you can leverage technology as you grow your business. Book an appointment today with Cin7 to revolutionize your warehouse and inventory management.
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