Inventory Metrics

Fishbowl CMO goes into detail on three key inventory metrics: Levels, Turnover, and Cycle Time. Knowing these can help businesses be more efficient, especially when they use software to track them.

Welcome to Whiteboard Wednesday. I’m Kirk Tanner, Chief Marketing Officer at Fishbowl. Today we’re gonna simplify our discussion, and we’re gonna talk about some basic inventory metrics.

The three that we want to talk about today are Levels, Turnover, and Cycle Time. So let me give you a little, brief discussion here about these so that we kind of understand what we’re talking about and understand one thing: these can be done in a manual process or they can be done in an automated process. But, regardless, if you have a business where you’ve got inventory these are things – basic metrics – that you should be doing to make sure that your business is running smoothly.

First, offer basic inventory levels. You’ve got a bunch of different products. You need to know at any given time what number of items you have on the shelf. So you might have a hundred different items and you need to know the quantities for each of those. In a manual process that means you’re at least sending people out, you know, quarterly – maybe monthly – to count these items and make sure that you know what your inventory levels are so that you can fulfill orders.

Then turnover – inventory turnover – is a little bit different. It’s related to your levels, but this is about calculating the ratio – how often that this inventory is turning over. So you might have Widget A in inventory and you might have 10 of those, but in a month you are gonna sell three of those, so your turnover ratio was a 0.3. Widget B, on the other hand, you might have 10 of those in inventory, but you might discover that your turnover ratio is actually a 2.0 meaning you’ve sold 20 of those in a month, which means you had to reorder to make sure that you were able to fulfill that item. So if you’ve got that kind of a turnover you may want to stock more to bring that turnover ratio down a little closer so that you don’t run the risk of being out of stock and not be able to fulfill orders.

Your final item is this cycle time over here. Now, cycle time can be calculated from many different perspectives. It could be calculated from the time it takes when you place an order with your vendor you get that shipment in and then you do whatever you do with it, whether it’s sell it or use those elements to create something and then sell it. But there is a time table in there that is the cycle time that it takes to complete this process.

It could also be calculated based on when a customer orders to when you fulfill. So you might determine that your cycle time includes the order coming in two days until it’s pulled from the shelf, it goes out in shipping, and then it’s gonna be three days until it’s delivered. Understanding that cycle time is important, as well, so that you make sure that you’re filling everything on time and that you’re not missing orders and that you just kind of know how your business is running.

All three of these together give you some basic metrics so that you can run a business more efficiently. Now, like I said, all of these can be done in a manual form. When you do it manually obviously there’s a lot of labor-intensive activity that goes into doing all these things if you’re really gonna be serious about doing this. You also, in a manual process, have the potential of introducing human error, and you can make mistakes because you’ve got people who were touching all these things constantly.

In an automated process, if you have software that’s gonna be integrated with your QuickBooks, all these things – the levels, the ratios, and the cycle times – are elements that are being tracked dynamically within the software. That means you can go in at any time and you can check what those levels are on any product and know exactly what you have. You know what your turnover ratios are. And you can see what your cycle times are.

So it’s just as easy as just going and looking whenever you want that information. And because it’s being done in a software solution rarely do you have errors because the human error has been minimized because it’s being all managed by software.

So that’s it. That’s inventory metrics for running a very efficient business. If you’re not doing this, this is something that you should get serious about. Look at your business and figure out how you can start tracking these inventory metrics.

That’s it for this Whiteboard Wednesday. Join us again next week. Thanks.

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