KPI of the Day – Sales: # Inventory to sales ratio (ISR)
Measures the ratio between the retailer’s inventory value and the sales revenue.
To determine whether the company is carrying too much inventory, by indicating the inventory on hand.
Carrying too much inventory on the company’s books can be an obstacle for operational and organizational growth, as this creates hesitation to produce or hire more, until inventory drops down to a more comfortable level.
Inventory management is one of the challenges many companies face in their efforts to adequately stock up on merchandise so that items are both always available and regularly refreshed.
By monitoring the # Inventory to sales ratio, wholesalers and retailers, in particular, can assess the feasibility of their inventory turnover rates, as well as, the validity of their service level agreements.
Some recommendations on conducting an effective inventory management include:
- Valuating and categorizing inventory items;
- Forecasting customer demand on individual items;
- Balancing item availability with inventory costs;
- Automating inventory processes.
Accurate reporting of this KPI depends on a well-maintained inventory and sales register. Reporting frequency should match the speed of the inventory turnover.
When it comes to target-setting, high level thresholds for this ratio indicate either a large amount of inventory on hand or sales stagnation. Caution should be taken when benchmarking this indicator, as it varies based on industry, market and product type.