Inventory key performance indicators (KPIs) are critical to supply chain performance.
Using these reports requires that you define initial parameters, such as a plant and a time period, so the system will only bring up the required information when executing the report or analysis.
Inventory KPIs are denoted as key figures and are expressed as numbers, such as a quantity or value, a currency or unit of measure, or a percentage.
Inventory turnover (MC44)
This is one of the most commonly used KPIs in inventory management, as it typically reflects the overall efficiency of the supply chain. It uses the formula: cost of goods ÷ average inventory. Inventory turnover is the number of times inventory must be replaced during a given period of time, and it specifies how often the average valuated stock is consumed or sold (turned over).
A low inventory turnover reflects excess inventory or an overstock situation, the presence of dead stock, and liquidity problems, which put increased pressure on working capital. In comparison, a high inventory turnover is usually seen as a positive sign, since it indicates the company is rapidly consuming or selling goods.
While this may be a good inventory management practice, it also points to insufficient safety stock that the company is maintaining and needs to investigate. To improve inventory turnover, companies can look into shortening their lead times by sourcing from local, instead of distant, suppliers; fine-tuning the service levels used; and refining forecast accuracy for materials.
It is also possible to know the average inventory turnover (transaction: MC.B), which is the average total consumption per day divided by the average stock.
Dead stock (MC50)
Dead stock is stock that hasn't been consumed during a given time period. To deal with excessive dead stock, revisit the safety stock level maintained in the system to bring it down to where there's minimal or no dead stock, but where you won't face supply chain disruption.
Safety stock is the minimum stock level of a material kept in inventory to account for any supply disruption or sudden demand surge.
Slow-moving items (MC46)
Slow-moving items denote stock that isn't obsolete or dead, but that has moved very little during a time period. Therefore, it makes sense to evaluate the last usage of slow-moving items, and to consider updating its safety stock and minimum stock levels to be as low as possible.
Range of coverage (MC42 [usage based] or MC43 [requirements based])
This key figure reflects the number of days during which the current stock will cover future stock issues, and it is based on past stock and issue values. In other words, the range of coverage indicates how long existing inventory will last, assuming that the average future stock issues will be the same as those in the past.
The usage-based range of coverage is calculated as follows: current stock ÷ average usage per day. The requirements-based range of coverage is calculated as current stock ÷ average requirement per day.
This KPI enables a company to spot materials with excess coverage, and to take action to reduce unnecessary inventory. The opposite is also true when it comes to identifying a potential shortage situation early on, so as to take corrective measures.
It is also possible to get insight into the average range of coverage (transaction MC.C).
Stock value (MC48), average stock value (MC49)
Knowing current stock values allows a company to identify which items tie up the most capital in the organization. This information can support any inventory optimization initiative.
This analysis can be based on either the current or the average stock value. Whereas the current stock value is calculated by multiplying the stock level with the current price, the average stock value is calculated by multiplying the average stock level with the current price.
Usage value (MC45)
By executing an analysis on the consumption (usage) value of a portfolio of materials, a company can determine which items have a high level of usage value and a high capital lockup. This information can provide insight into which materials are the big movers in the company, and can also help to identify potential slow-moving items.
Requirement value (MC47)
This key figure provides insight into materials that have a high level of requirement value, and which are, therefore, possible candidates for high capital lockup in the future.The requirements value of a material is derived from the current price of valuated requirements within a period of time (in the future).Figure 1 shows the requirement values of the top 15 materials for plant 1000 and their share (expressed in percentage) of total requirement value as of Mar. 25, 2017.
Besides SAP ERP's metrics around inventory KPIs, there are many more logistics and supply chain reports and analytics available in SAP ECC. To view them all, follow the menu path Information systems > Logistics > Inventory management.
If you are unsure or unaware about any key figure or formula used in calculating a key figure, simply select that key figure and press F1, and the system will display detailed information about it.
Lessons on better inventory management in SAP ECC
Why overall equipment effectiveness is an important KPI
Here's why enterprise asset management software matters
Dig Deeper on SAP ERP software and modules
Related Q&A from Jawad Akhtar
Replenishment strategies, lot sizes, safety stock, reorder point planning and replenishment lead time are five factors in ERP that can ensure ... Continue Reading
S/4HANA public cloud provides a less disruptive route to digital transformation than some options -- including the on-premises S/4 -- and smoother ... Continue Reading
These nine key components of SAP MDG help ensure regulatory, legal, environmental and financial compliance of your master data and improve ... Continue Reading