6 Key Metrics to Improve Your Inventory Storytelling: A Guide from Supply Chain Consulting Companies

Are you responsible for telling the story of how well you’re managing your inventory? It can be challenging to determine if you’re managing it efficiently because inventory is always in motion. Here are our insights into the narrative to present and the metrics to support it.

Why We Have Inventory

In the supply chain story, variability is the villain. If there were no unpredictability in our supply and demand, we could plan inventory delivery to match shipments perfectly, and there would be no need for inventory buffers. However, we live in reality, where there is a lot of variability on both sides. To buffer against variability, inventory is a common tool in supply chain management.

The ideal amount of inventory at each individual SKU level is enough to enable us to ship customer orders on-time and in-full (OTIF) without tying up excessive amounts of money (capital) in the process. For example:

• If you’re running a business and need to buy three months of inventory, paying for that inventory with a line of credit means paying two months of interest before selling your inventory and paying off the balance. The interest rate is the cost to your business.

• Alternatively, if you have $10,000, and each month of inventory costs $3,000, spending $9,000 of your money to buy inventory means you won’t have that money available to buy other things you need.

• If you only needed two or one months of inventory, you could avoid interest costs and/or keep $3,000-$6,000 available for other expenses.

It’s crucial to align on the service level you’re targeting. The difference in inventory requirements to get from 95% OTIF to 98% OTIF is exponentially higher than getting from 90% to 95%.

Telling The Story

Inventory storytelling is a pivotal aspect of supply chain management that goes beyond mere data collection and is integral to forming a robust business strategy. We aim to maintain an optimal balance between service level and working capital investment while managing our inventory. As a supply chain practitioner, it’s crucial to explain the rationale behind inventory targets, the impact on customers and operations, and how changes in business assumptions affect inventory requirements. These abilities are essential for effective inventory management.

However, taking a snapshot of inventory management is not sufficient to get an accurate picture. Measuring and trending over time is necessary to create the right metrics. Below, we explain our favorite metric trends that have helped our clients and previous employers gain better control over their inventory.

In The Absence Of Better Metrics

In most organizations, the only metrics used to measure inventory are Days of Inventory On Hand (DIO) and Inventory Turns, both of which are generally financial calculations derived by the Finance team. They are not particularly helpful in managing inventory from an operational perspective. A deeper look at these metrics is needed:

1. DIO = (Average Inventory Value / Cost of Goods Sold ) * # days in period

2. To calculate DIO, take the value of inventory on Day 1 and the value of inventory on Day 30, average the two, divide by the cost of goods sold, and multiply the result by the number of days in the period, which, in this case, is 30. This gives the number of days of inventory on hand in financial terms.

3. The risk with this metric is that materials with high cost/value variability will see fluctuations in value that are not actually reflective of the volumes of inventory movement. This metric is also generally aggregated to an overall or product grouping, which doesn’t provide insights to optimization opportunities to the planning and inventory control teams.

4. Inventory Turns = Divide 365 by the # days of inventory to get the number of annual turns.

5. This metric suffers from the same problems as DIO. If the numbers are financial in nature, they are at risk of fluctuating based on product cost or not being at a level of detail that’s insightful for operations.

The Right Stuff

To help operational teams identify problematic products within a portfolio and determine optimal targets, we recommend adding the following metrics, measured at the material level and aggregated into meaningful categories as needed:

1. Days of Supply: Current inventory position divided by the number of anticipated units of sales or consumption. This provides a volumetric view of inventory relative to needs, which is not affected by product cost.

2. Percentage of Materials In-Range: Define minimum and maximum stocking positions and take a snapshot of how many materials are between those two limits.

3. Percentage of Inventory At-Risk: Inventory in hold status, off-spec, or approaching the end of its shelf life.

4. Percentage of Slow Moving Inventory: Inventory that is significantly over the target range.

5. Percentage of Inventory Stocked-Out: Ideally, no more than the tolerance set by the cycle service level. If the CSL is 95%, no more than 5% of materials should be stocked-out at any time.

6. Inventory Accuracy: Inventory adjustments (in the system) as a percentage of total inventory for a given period.

These metrics should be tracked over time to understand trends and set goals for improvement. Industry benchmarks for inventory performance are difficult to come by and not very helpful because inventory is unique to each business’s needs.

Measuring at the material level enables the team to focus on right-sizing. These metrics offer a more holistic and insightful picture of how effectively inventory is being managed as a whole and where to focus on improvements. Improvements generally come in the form of overall business process and decision-making improvements.

For more information about inventory improvements, metrics implementation, or business process improvements, please contact us at info@waypostadvisors.com.

Understanding the Importance of Inventory Storytelling

Inventory storytelling is a pivotal aspect of supply chain management that goes beyond mere data collection. It involves weaving a narrative around inventory data to provide actionable insights and drive strategic business decisions. In today’s competitive landscape, understanding the importance of inventory storytelling can be a game-changer for businesses. By optimizing inventory levels, reducing costs, and enhancing customer satisfaction, companies can gain a significant competitive advantage.

Leveraging data analytics and visualization tools, businesses can transform raw data into compelling stories. These stories help identify trends, patterns, and areas for improvement, making it easier to communicate complex information to stakeholders. Effective inventory storytelling not only aids in better decision-making but also fosters a culture of continuous improvement within the organization.

Key Inventory Metrics

To craft a compelling inventory story, businesses must track and analyze key inventory metrics. These metrics provide a comprehensive view of inventory performance and highlight areas that need attention. Here are some essential metrics to consider:

• Inventory Turnover: This metric measures how often inventory is sold and replaced over a specific period. A high turnover rate indicates efficient inventory management, while a low rate may suggest overstocking or slow-moving items.

• Inventory Levels: Keeping track of the quantity of inventory on hand, including raw materials, work-in-progress, and finished goods, helps in maintaining optimal stock levels and avoiding stockouts or excess inventory.

• Days Inventory Outstanding (DIO): DIO calculates the average number of days inventory remains in stock before being sold. It provides insights into how quickly inventory is moving and helps in identifying potential bottlenecks.

• Inventory Obsolescence: This metric tracks the percentage of inventory that is no longer usable or saleable. High obsolescence rates can indicate issues with demand forecasting or product lifecycle management.

• Inventory Accuracy: Ensuring that inventory records match the actual stock on hand is crucial for effective inventory management. Inventory accuracy measures the percentage of inventory that is accurately tracked and accounted for.

By monitoring these metrics, businesses can gain a deeper understanding of their inventory performance and identify areas for improvement, ultimately leading to more efficient supply chain operations.

Implementing Inventory Storytelling in Your Supply Chain

Implementing inventory storytelling in your supply chain requires a methodical, data-driven approach. Here are some steps to guide you through the process:

1. Collect and Integrate Data: Gather data from various sources such as enterprise resource planning (ERP) systems, inventory management software, and supply chain analytics tools. Integrating this data provides a holistic view of your inventory.

2. Analyze and Visualize Data: Use data analytics and visualization tools to create interactive dashboards and reports. These tools help in making sense of complex data and provide clear insights into inventory performance.

3. Identify Trends and Patterns: Analyze the data to uncover trends, patterns, and areas for improvement. Understanding these elements is crucial for making informed decisions.

4. Create a Narrative: Use the insights gained from data analysis to craft a narrative around your inventory performance. Highlight successes, challenges, and opportunities for improvement to create a compelling story.

5. Share the Story: Communicate the inventory story with stakeholders, including suppliers, manufacturers, and customers. Sharing this narrative helps in driving business decisions and improving overall supply chain performance.

By following these steps, businesses can effectively implement inventory storytelling, leading to more informed decision-making and enhanced supply chain capabilities.

Best Practices for Inventory Storytelling

Creating an effective inventory story requires a blend of data analysis, visualization, and storytelling techniques. Here are some best practices to follow:

• Use Data Visualization Tools: Leverage tools that create interactive and engaging dashboards and reports. Visual representations of data make it easier to understand and communicate complex information.

• Focus on Key Inventory Metrics: Concentrate on essential metrics such as inventory turnover, inventory levels, and DIO. These metrics provide valuable insights into inventory performance.

• Analyze Data from Multiple Sources: Integrate data from various sources to gain a comprehensive understanding of your inventory. This holistic view helps in identifying trends and making informed decisions.

• Employ Storytelling Techniques: Use narrative and visualization to create a compelling story around your inventory data. A well-crafted story can effectively communicate insights and drive action.

• Share the Inventory Story: Regularly share the inventory story with stakeholders to keep them informed and engaged. This practice helps in aligning goals and improving supply chain performance.

By adhering to these best practices, businesses can create powerful inventory stories that drive strategic decisions and enhance supply chain operations.