6 KPIs That Influence Inventory Optimization
Inventory is the lifeblood of any manufacturing business. Get it right, and you’ve got happy customers and streamlined costs. Get it wrong, and you risk financial strain and fulfillment headaches. Striking the perfect balance between available stock and cost efficiency is key. That’s where data-driven decision-making comes in! By leveraging analytics and key performance indicators (KPIs), manufacturers can optimize inventory, reduce waste, and boost profitability.
Tracking inventory flow and performance across your supply chain is a must. But what exactly should you measure? The right KPIs depend on your company’s unique needs and goals. In this post, we’ll dive into six critical KPIs that influence inventory optimization.
These KPIs are based on Silvon’s long-time experience working with manufacturers and distributors to enhance their sales and operational performance analysis and reporting capabilities. We’ve even included some examples of these KPIs using pre-built views for inventory reporting from our Stratum business intelligence solution.
Available to Promise (ATP)
Available to Promise (ATP) is a real-time inventory management metric that tells you how much of a product you can promise to customers without overcommitting. As illustrated below, ATP is based on current inventory, incoming production or deliveries, and existing customer orders (committed stock). Essentially, it’s what’s left after commitments — the free-to-sell stock.
Example View – Available to Promise
Why is ATP important?
- Improves customer satisfaction because you avoid promising items you don’t have
- Optimizes inventory by preventing excess stock and shortages
- Boosts warehouse efficiency by streamlining picking, packing, and replenishment
How does ATP help in business planning?
- Sales teams use ATP to give accurate delivery dates.
- Production teams plan runs based on what’s promised vs. what’s needed.
- Supply chain managers use ATP to trigger reorders or adjust forecasts.
Average Time to Sell
Average Time to Sell measures how long it takes to sell a product after it becomes available in inventory. This KPI is especially valuable in retail, eCommerce, and B2B distribution.
Why is Average Time to Sell important?
- Gives you better insight into sales velocity by identifying fast vs. slow-moving products
- Increases inventory efficiency by lowering time to sell and gaining faster cash conversions
- Gives you the insights needed on pricing, promotion, and discontinuations for better product-related strategies
- Promotes warehouse optimization by identifying slow-moving items that can cause clutter and higher holding costs
High Average Time to Sell may signal:
- Overpriced or mispositioned products
- Weak demand or seasonal mismatch
- Ineffective marketing or sales effort
- Inventory levels too high for current sales pace
How can you reduce Average Time to Sell?
- Adjust pricing strategies or offer promotions
- Improve product visibility (online, in-store, or through sales channels)
- Fine-tune inventory levels to align with demand
- Use customer behavior data to stock what actually sells
- Optimize listing content and marketing efforts
Example View – Average Time to Sell
Pro Tip:
As illustrated in the example link above, use Average Time to Sell alongside Inventory Turnover and Days On-Hand to get a full picture of product movement and working capital efficiency.
Inventory Turnover
Inventory Turnover is a key performance metric that shows how often inventory is sold and replaced during a specific period (usually monthly, quarterly, or annually). This KPI is super important because it directly shows how efficiently a company manages its stock, particularly when highlighted alongside Average Time to Sell and Days On-Hand as shown in the screenshot above.
Example View – Inventory Turnover
Why is Inventory Turnover Important?
High Turnover indicates strong sales, efficient inventory management and less money tied up in stock
Low Turnover may indicate slow-moving products, tied-up capital, increased holding costs, and obsolete inventory down the road
Ideal Turnover Rate
Depends on your industry. Benchmark against your industry average for best insight.
How can you improve Inventory Turnover?
- Use just-in-time (JIT) inventory systems
- Improve sales forecasting
- Reduce lead times from suppliers
- Offer promotions on slow-moving items
Inventory to Sales Ratio
Inventory to Sales Ratio measures how much inventory you’re carrying relative to your sales volume over a given period and answers the question: “Are we holding too much stock for the amount we’re selling?”
This KPI helps you balance inventory investment with sales performance, keeping your business lean and cash efficient. In the example below, we’ve highlighted Inventory to Sales Ratios by value across several product brands.
Example View – Inventory to Sales Ratio
Why is Inventory to Sales Ratio important?
- Can help you increase operational efficiency with more efficient inventory usage
- Provides better cash flow insight by pinpointing capital that’s tied up in stock
- It helps flag overstocking or underperformance early for better demand planning
- It’s often tracked by investors or analysts to assess how well you manage assets vs. revenue
How can you optimize Inventory to Sales Ratio?
- Improve demand forecasting and align purchasing with actual sales trends
- Use sell-through rate analysis to right-size future buys
- Monitor slow movers and take action early (e.g., bundling, promotions)
- Optimize reorder points to reduce idle stock
Pro Tip:
Pair Inventory to Sales Ratio with GMROI to ensure you’re not just moving inventory — you’re making profitable sales too. More about GMROI can be found in Section 6 below.
Reorder Point Analysis
Reorder Point is the inventory level at which you need to place a new order to avoid running out of stock before the next shipment arrives. While this KPI can remain static for many products over a long period, analyzing it on a regular basis is highly suggested.
A monthly analysis is a good starting point. Some products might require weekly or even daily analysis, especially those with high demand fluctuations or long lead times.
Example View – Reorder Point Analysis
Why is Reorder Point Analysis important?
- Prevents stockouts to ensure you never run out of high-demand items
- Protects customer satisfaction by keeping orders flowing without delay
- Optimizes inventory by avoiding overstocking while maintaining service levels
- Helps to streamline operations by reducing the stress and cost of emergency orders
What happens if your Reorder Point is wrong?
- ROP too high can tie up cash in excess inventory and increase holding costs.
- ROP too low can cause stockouts, rushed shipping fees, and lost sales.
Getting it right is critical for profitability and supply chain stability.
How can you improve your Reorder Point?
- Regularly update your sales velocity and lead time data
- Monitor and adjust for seasonal demand changes
- Tighten supplier performance (reduce variability in delivery times)
- Factor in promotion schedules or market trends that could spike demand
Gross Margin Return on Investment (GMROI)
Gross Margin Return on Investment (GMROI) is a sales-focused metric that measures how much gross profit you earn for every dollar invested in inventory.
Why is GMROI important?
- Unlike turnover or stock levels, GMROI looks at actual profitability.
- It helps with better product selection by identifying low-GMROI items that may be tying up cash with poor returns.
- It supports smarter buying by showing which categories or products deliver the best ROI.
- It provides better cash flow clarity to ensure you’re investing in inventory that pays off.
Low GMROI might mean:
- You’re overstocked on low-margin or slow-selling items
- Prices are too low, or discounts are too steep
- Your cost of goods is too high
Example View – Gross Margin Return on Investment
How can you improve GMROI?
- Increase product margins (better pricing or sourcing)
- Reduce inventory levels without hurting availability
- Focus on fast-moving, high-margin items
- Use ABC analysis to prioritize high-impact SKUs
Leverage Data for Smarter Inventory Decisions
With the right KPIs in place, businesses can fine-tune their inventory strategies, improve cash flow, and meet customer demands with precision. At Silvon, we help mid-market manufacturing and wholesale distribution companies unlock data-driven success with our Stratum™ product suite. Our solutions deliver pre-built, enterprise-level analytics; a secure Data Hub for integrating, aligning and serving up vetted information from multiple sources to business users; and seamless integration with Power BI, Excel, and other leading tools.
Want to dive deeper into KPIs?
Download Silvon’s Definitive Guide to KPIs: Concepts, Best Practices & More
and start optimizing your inventory today!