How to Measure The Success of Inventory Systems

A successful inventory system makes keeping up with supplier deliveries and filling customer orders easy while still keeping the overall worth of the inventory within acceptable parameters.

While implementing an inventory system is a great step forward in keeping up with transfers into and out of your inventory, don’t consider your job complete. As part of the ongoing dedication to managing resources with the greatest degree of efficiency, it is necessary to check on how well your system is working. That means taking time to evaluate the performance level of several key functions within the system and adjusting those functions as needed. Here are examples of how you can measure the success of your inventory system and make sure the system is functioning at optimum efficiency.

In order to measure the success of any inventory system, it is necessary to periodically evaluate what is known in many companies as key performance indicators. Because the exact structure of inventory systems will vary slightly from one situation to another, it is important to measure the level of performance as it relates to the goals and general operating procedures of your company. However, there are a handful of key performance indicators that are useful in almost every situation.

Your first group of indicators has to do with how well your inventory system is helping your business meet, and possibly exceed, the expectations of your customers. Your system must be capable of accounting for everything that is currently in your finished goods inventory, including what was produced as of the latest completed production cycle. This will optimize the chances of pulling units for customer orders in a timely manner and notifying the shipping department that the order is ready to be released.

The truly successful inventory system makes it possible for your company to shorten the lead-time necessary for order fulfillment by speeding up the process of identifying and removing from inventory the items that are needed by the customer. Compare the average lead-time in the period just before the new inventory system was implemented with the most current period and see if there has been improvement. If so, you know your system is functioning properly.

Measuring the efficiency and success of your inventory system also involves how well the process helps with placing orders with suppliers and vendors. Ideally, your inventory software is capable of adjusting the ordering quantities and delivery lead-time to match the current performance of the suppliers. If not, there is a good chance that your system will flag an item for reorder too late to keep the production process running smoothly. The result is downtime for the production departments, which costs the company money.

A solid inventory system makes it possible to strike that perfect balance between the stock that is on hand and the stock that is needed to operate the company efficiently. This is very important, as maintaining a high inventory means paying more taxes in most cases. When the system is capable of providing data that makes it possible to keep the inventory within a given range, and is capable of flagging items for obsolescence when applicable, your system is successfully and competently managing the inventory, while still minimizing the amount of taxes due each period.

When some aspect or function of your inventory system is not working at full efficiency, there is the need to take immediate action. In some cases, this will be a matter of making a few minor changes to the software. However, if the inventory system is limited and too rigid to allow for occasional refinements, you would be well advised to begin looking for a new inventory system that will meet your company’s needs.