Inventory management is a crucial aspect of any business that deals with physical products. Small and medium-sized product-based businesses, in particular, need to understand inventory management KPIs (Key Performance Indicators) to run their operations efficiently and effectively. In this blog post, we will discuss why small and medium-sized businesses need to understand inventory management KPIs and how it can help them grow and succeed.
According to the US Census Bureau, there were 31.7 million small businesses in the United States in 2020. Out of these, around 78.5% of small businesses are classified as non-employer businesses, which means that they have no employees other than the owner. For these businesses, managing inventory can be a daunting task, especially if they do not have the right tools and knowledge.
Inventory management KPIs help businesses track their inventory levels, sales trends, and profitability. By monitoring these KPIs, small and medium-sized businesses can make informed decisions about their inventory and avoid overstocking or understocking products. This can lead to improved cash flow, reduced carrying costs, and increased profitability.
One of the most important inventory management KPIs is inventory turnover. Inventory turnover measures how quickly a business sells its inventory over a period of time. A high inventory turnover indicates that a business is selling its products quickly and efficiently, while a low inventory turnover suggests that a business is struggling to sell its products. According to the US Small Business Administration, the average inventory turnover for retail businesses in the United States is around 5.5 times per year. Small and medium-sized businesses can use this KPI to determine whether they need to adjust their inventory levels or pricing strategies to improve sales and profitability.
Another important inventory management KPI is the gross margin return on investment (GMROI). GMROI measures the profitability of a business's inventory by comparing the gross profit to the average inventory investment. A high GMROI indicates that a business is generating significant profits from its inventory, while a low GMROI suggests that a business is not generating enough profits from its inventory. According to the Canadian government's Small Business Dashboard, the average GMROI for small retail businesses in Canada is around 2.7. Small and medium-sized businesses can use this KPI to determine whether they need to optimize their inventory mix, pricing strategies, or sourcing strategies to improve profitability.
Finally, another important inventory management KPI is the stockout rate. The stockout rate measures the percentage of time that a business runs out of stock of a particular product. A high stockout rate indicates that a business is losing sales due to a lack of inventory, while a low stockout rate suggests that a business is meeting customer demand effectively. According to the US Small Business Administration, the average stockout rate for retail businesses in the United States is around 8%. Small and medium-sized businesses can use this KPI to determine whether they need to adjust their inventory levels or reorder points to avoid stockouts and improve customer satisfaction.
In conclusion, small and medium-sized product-based businesses need to understand inventory management KPIs to manage their inventory effectively and efficiently. By monitoring inventory turnover, GMROI, and stockout rate, businesses can make informed decisions about their inventory levels, pricing strategies, and sourcing strategies. This can lead to improved cash flow, reduced carrying costs, increased profitability, and customer satisfaction. For businesses that need assistance with inventory management, working with an inventory consultant or business consultant can provide valuable insights and recommendations.