The inventory KPIs worth watching in a small making business are the ones that answer four questions: how much money is sitting on the shelves, whether the numbers can be trusted, how much is being lost, and whether stock is there when it's needed. That's nine numbers: inventory turnover, days of stock on hand, count accuracy, write-offs, stock expiring soon, items at their reorder point, stockouts, supplier on-time deliveries and gross margin. Most come from figures you already have: a count, your receipts and your sales. In the example below, a small kitchen's October puts three KPIs on watch, write-offs at 2.8% of cost of goods, two stockouts and 85% of deliveries on time, and the three turn out to be one problem. Below is each KPI with its formula, how to read them together, how to set targets, and a free dashboard.
The short version
- Money on the shelf: turnover and days of stock on hand.
- Trust: count accuracy, measured by value, not by count.
- Losses: write-offs, and the stock expiring in the next 30 days.
- Availability: items at their reorder point, and stockouts.
- Suppliers: deliveries on time, which drives the stockouts.
- Profit: gross margin, which every loss above eats into.
- TaroStack keeps the figures behind each KPI as the work happens, so month end isn't a day of adding up. More below.
The nine KPIs
Windward Roots, the made-up taro business I use in these examples, works out its KPIs at the end of each month. October:
| KPI | Formula | October | Target | Status |
|---|---|---|---|---|
| Inventory turnover, a year | Cost of goods sold ÷ average stock value, scaled to a year | 8.8 | 8 or more | OK |
| Days of stock on hand | Average stock value ÷ cost of goods sold × days | 41.3 | 45 or fewer | OK |
| Count accuracy, by value | 1 − value of differences ÷ value counted | 98.1% | 98% or more | OK |
| Write-offs | Expired, spoiled and damaged at cost ÷ cost of goods sold | 2.8% | 2% or less | Watch |
| Expiring in 30 days | Stock with a date in 30 days ÷ stock value | 4.6% | 5% or less | OK |
| Items at reorder point | From the reorder list | 4 | 5 or fewer | OK |
| Stockouts | Times something needed was at zero | 2 | 0 | Watch |
| Supplier deliveries on time | On time ÷ deliveries | 85% | 90% or more | Watch |
| Gross margin | (Sales − cost of goods sold) ÷ sales | 53.5% | 50% or more | OK |
The month's figures: stock worth $8,400 at the start and $9,200 at the end, $6,600 cost of goods sold on $14,200 of sales, a count of items worth $3,100 on the books that were found to be worth $3,040.50, $186 written off, $420 expiring in the next 30 days, and 17 of 20 deliveries on time.
Money on the shelf: turnover and days on hand
Turnover says how many times a year the stock is used up and replaced; days on hand says the same thing as a number of days. October's average stock of $8,800 against $6,600 a month of cost of goods sold is 41.3 days on hand, or a turnover of 8.8 a year. Higher turnover means less cash tied up, until it tips into running out. How to work turnover out properly is in inventory turnover example, and the days version in days inventory outstanding example.
Trust: count accuracy, by value
Count accuracy measures how close the books are to the shelf. Measure it by value: forty missing labels and two missing bags of chips are both "differences", but the chips cost more. October's count found $59.50 less than the books said on $3,100 counted, 98.1% accurate. If accuracy is poor, every other KPI on this page is built on sand. How to work the formula, and what to do with the differences, is in inventory accuracy formula.
Losses: write-offs and stock expiring soon
Write-offs are stock you paid for and threw away: expired, spoiled or damaged, at cost. October's $186 is 2.8% of cost of goods sold, over the 2% target. The stock expiring in the next 30 days is the warning light for next month's write-offs: $420, or 4.6% of the shelf, is inside its target but close to it, which means it's time to use or sell it first. What expired stock costs and how to record it is in what is expired stock.
Availability: reorder point and stockouts
Items at their reorder point are the ones to order now; four of 62 is normal. Stockouts are the ones that were needed and weren't there: a batch that waited, an order that went short. Two in a month is two too many for a business whose customers are shops.
Suppliers: on-time deliveries
October's 17 of 20 deliveries on time is 85%. This is where the three Watch KPIs connect. Both stockouts were coconut milk, from the supplier that delivered late twice, so the batches that waited were made late, and the extra kūlolo made in a rush to catch up is most of the $186 written off when it didn't sell before its date. One supplier, three KPIs. The fix is in the reorder point, which should use the supplier's real lead time, not the promised one; how is in lead time calculation formula.
Profit: gross margin
Gross margin, 53.5% in October, is where every loss above ends up. The $186 of write-offs alone is 1.3 points of margin on $14,200 of sales. Watching margin without the KPIs that move it is watching the score without the game.
Setting your own targets
The targets in the example are Windward Roots' own, not industry figures. Set yours from your last three months: where you are, and a little better. A business with a short shelf life will run fewer days on hand than one selling candles; a business with one supplier will care more about on-time deliveries than one with five. Change a target when the business changes, not to make a month look better. Work the KPIs out monthly, and look at the reorder list and expiring stock weekly.
Get the dashboard
Download the inventory KPI dashboard. Type your month's fourteen figures on the first sheet, and the dashboard works out the nine KPIs and marks each OK or Watch against targets you set. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
The dashboard is simple. The fourteen figures behind it aren't: the opening and closing stock values need a count costed at what you paid, the write-offs need every expired and damaged item recorded with its cost, the expiring stock needs every lot's date, and the on-time deliveries need every receipt compared with its purchase order's date. Done from paper and spreadsheets, that's most of a day at the end of every month, so it stops happening by March.
How TaroStack does it
TaroStack keeps the figures behind each KPI as the work happens, so the month's numbers are already there.
Stock and its value. Stock value by site and by month comes from FIFO cost layers, landed costs included. Counting works on a phone with no signal, shows what each difference is worth before you post it, and suggests what to count first.
Losses and what's coming. Every adjustment carries its reason, expired, spoiled, damaged and the rest, so losses are reported by reason, item and site at their cost. A forecast shows what will expire unsold and what it's worth, while there's time to use it.
Availability and suppliers. The reorder list shows days of cover, with suggested reorder points, and alerts flag stock below its reorder point, lots expiring and purchase orders overdue. TaroStack compares what each supplier promises with how long their deliveries really take. Margins are reported by product and by customer, and every list exports to CSV if you keep your own dashboard.
| The figure | Spreadsheet | In TaroStack |
|---|---|---|
| Stock value, start and end | A costed count | By site and month, at FIFO cost |
| Count differences | Worked out after | Valued before you post |
| Write-offs by reason | Rarely recorded | Losses by reason, item and site |
| Expiring in 30 days | Read every date | The expiry forecast, with its cost |
| On-time deliveries | Compare dates by hand | Lead times checked against reality |
Stock value, counts, losses by reason, the expiry forecast, the reorder list and alerts are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.