How do I measure my inventory management performance?
To measure performance in inventory management, one of the most common metrics to use is “number of inventory turns.” This number is calculated using the ratio of the value of purchased stock to the value of stock on hand. The metric, number of inventory turns, aims to measure the movement of stock. The higher the turnover, the less time your inventory spends sitting in storage.
Other metrics to gauge inventory performance, are “stock outs” (i.e. the frequency of inventory requests without available stock) and “inactive stock” (i.e. the amount of non-critical stock that remain unused over a period of time). While these metrics provide an extended view of the stocking performance of a plant, the number of inventory turns is most commonly used to measure success of inventory levels.
Appropriate levels of inventory, as measured using the number of inventory turns, allow plant personnel to take steps towards lowering costs (reducing spending on unneeded inventory) while increasing operational productivity (preventing stock outs).
Optimizing Costs and Productivity
Inventory refers to the materials on hand that are available to be used by the plant across categories such as critical spares, consumables, operational supplies, etc.
Calculating how fast the inventory is moving provides valuable insight on how efficiently the inventory is being managed. While having sufficient stock on hand is crucial to keep operations going smoothly, purchasing and storing stock incur corresponding costs. Optimizing inventory levels keeps a healthy balance between managing costs and maintaining enough inventory to sustain operations.
Calculating Inventory Turns
The number of inventory turns, also known as stock turn, is calculated by taking the value of stock purchased, divided by the value of stock on hand.
In equation form:
Inventory turns = Value of stock purchased/Value of stock on hand
Value of stock purchased = the total value of inventory items purchased over a period of time
Value of stock on hand = the current value of inventory that is in stock
For example, if over a period of one month the total value of purchases amounted to $5,000 while the current value of stock on hand is $2,500, then inventory turns can be calculated as:
Inventory turns = $5,000,000/$2,500,000 = 2
Target value of 1.0
As a rule of thumb, the Society for Maintenance & Reliability Professionals (SMRP) suggests an inventory turn value greater than 1.0 when accounting for the total inventory, and a value greater than 3.0 when accounting for inventory without critical spares.
Note that target values are expected to vary across different industries. Values may also vary depending on the maintenance strategy used by an organization.
Inventory Management Software Can Help
The key to a meaningful inventory metric is collecting accurate data, and doing so efficiently. Gathering accurate inventory data, while exerting minimal manual effort, is best achieved using inventory management software.
Using inventory management software can keep track of your inventory purchases and usages as your purchase orders and/or work orders are issued. This relieves individual workers of a lot of the manual tracking, thereby allowing for a consolidated database of and easy access to metrics about the flow of inventory.