Inventory Metrics for the New World
Historically, companies that shipped product from finished goods inventory such as distributors and e-commerce companies, for their inventory performance measures (related to customer-service) used fill rate.
- Unit fill rate = units shipped / units ordered
- Line fill rate = number of lines on an order filled complete / total lines on the order
Often these measures are based on shipping orders “same day” or “next day.” A convenient way of measuring fill rate is by measuring backorders. We have all been convinced that low backorders is good. However, what if customers see on your web site that you have zero on hand and don’t order from you? Backorders are expensive but they mean the customer accepted that he or she will have to wait for the product. It seems clear that Amazon, traditional retailers using omni-channel and e-commerce companies are training us to expect any item, anywhere, immediately. Traditional distributors need to pay attention to this change because they could be doing great on fill rate and yet see sales decline.
Perhaps it is time for a change. Perhaps the most important measure you have of your inventory performance is out-of-stocks or OOS. If they see on your web site (or by call into your call-center) that you don’t have enough to fulfill their order complete, it is likely they will go elsewhere and buy from another company. Therefore, what we want to do is measure and minimize stock outs.
Out-of-Stocks = number of SKUs with zero on-hand / Total SKUs
One way to evaluate out-of-stocks is to begin to understand how a zero on-hand quantity affects your customers’ propensity to buy. Modern e-commerce software can measure customers that choose to view your item and not purchase. Another strategy is to determine if conversion rate of visitors to your web site (or calls into your call-center) to out-of-stocks is correlated. Our experience at Supply Velocity says that this is highly likely. Even without a technology solution, it is critical that somehow you capture data relative to lost sales.
A well-known saying is “you manage what you measure,” therefore, it is time to start measuring the number of items with zero on hand as percent of total items you stock. A or A+ items should have the lowest out of stock percent, B items will be higher, and C the highest. For more information on Supply Velocity’s Inventory Optimization service review our Supply Chain Service Summaries.