The most important measurement of inventory management

If you have inventory, what types of tools are you using? And how effective are they?  How closely can you monitor the performance of your investment in inventory? These four measurements can help ensure that you are getting the most out of your inventory:

  1. Customer service level
  2. Replenishment
  3. Forecasting
  4. Landing cost

Customer Service Level

The first measurement is customer service level, which is how often you have the items you have committed to stock when your customers want them. This is the most important measurement because if you do not have what your customers want, when they want it, chances are they will purchase elsewhere.

Essentially, customer service level represents a trade-off between the cost of inventory and the cost of stock-out. It can also be defined as the probability of being able to meet the customer’s demand.

Before setting the goal of a feasible customer service level, consider the following steps:

Interpreting the customer service level 

Make sure that all departments in your organisation know the definition of customer service level and how it relates to their job. Item versus order service levels needs to be clear. Item service levels focus on the ability to satisfy the number of units ordered. Order service levels focus on the ability to satisfy individual customer orders. It is important to distinguish what is being measured and over what period.

Determining the current service levels 

If you do not know where you are, it is impossible to get where you want to be. It is important to establish a benchmark to understand if the current inventory stocking policies are meeting expectations on both an aggregate level and an item level. What percentage of the demand was filled from stock compared to advancing? Were there certain items that never stocked out while others routinely did?

Identifying overstocked and understocked items

Technology enables sophisticated analyses across thousands of items to set a benchmark for each, and to determine which items run the risk of stocking out, and which may be overstocked relative to service level goals.

Do you agree with the importance of customer service level? What to you consider to be the most important parts of inventory management? Tell us in the comments below!

Learn about three other inventory management measurements: replenishment, forecasting, and landing cost, by downloading our free whitepaper.