How do you ensure your products’ launches are successful and their lifecycles are long and fruitful? Sure, you could throw some ideas against the wall and see what sticks, but that’s never a good idea. The truth is, even some of the most recognizable global brands have had epic failures when it comes to marketing their products. If you look into the history of these botched business attempts, you’ll often find there’s a unifying missing link amongst most of them—the lack of an application of data.
On the other hand, brands that have made profitable decisions usually have a strong history of pouring over data so they can be better informed of their supply chains, sales forecasts, process efficiencies, and customer trends. Of course, you don’t need to examine just any data; you need data that’s timely and whole so you can perform careful analyses that ultimately guide your business decisions.
With this in mind, we wanted to explore the following key performance indicators (KPIs) that every product company should be monitoring consistently.
1. Forecast Accuracy
It’s important to forecast your sales to ensure you have product available when it’s needed. With that said, it’s extremely difficult (if not impossible) to forecast the future if you don’t have data from the past. Over time, you’ll begin to accumulate more historical data, which will allow you to spot seasonal trends and changes in customer demands. If your forecasts are too high or too low, it’s a sign that your forecasting process needs to be revised.
Forecast accuracy = 1 – (actual sales – forecast) / actual sales
2. Inventory Turnover
Although the definition of a “good” inventory turnover is highly dependent upon the industry you work in and the types of goods you sell, generally speaking, the higher the turnover rate, the healthier your company. As long as you’re hitting the proper margins, you want to see a high inventory turnover ratio. It’s helpful to look at this KPI from both an overall inventory turnover level and from a product-by-product perspective. It’s also useful to examine this ratio both quarterly and annually.
Inventory turnover = total cost of goods sold / average inventory
3. Cost of Goods Sold (COGS)
Speaking of COGS, this is an incredibly important metric in the retail, distribution, and manufacturing industries. Determining your true COGS will help you price your products as accurately as possible so you’re covering your costs and making a profit.
There are a few different ways to look at COGS, with the most straightforward approach being as follows:
Total cost of goods sold = starting inventory + purchases – ending inventory
With this calculation, however, you’ll be missing some key costs that are associated with your products, such as your direct costs (e.g., parts and labor) and indirect costs (e.g., rent, utilities, and insurance).
Because your cost of goods sold will show up in a variety of other KPI calculations, it’s important to understand what you want to include in your COGS and which items you should leave out.
Total cost of goods sold = total direct costs + indirect costs
4. Days Inventory on Hand
Days inventory on hand is closely related to inventory turn. Generally, the lower the number, the better your company is at selling its stock; however, if your numbers drop too low, you put yourself at risk of not having product available when your customers need it.
When your days inventory on hand calculation is on point, it means you have good control of your stock.
Days inventory on hand = average inventory / average sales per day
5. Monthly Days Inventory on Hand
Of course, you should still be using your data to help you forecast as accurately as possible. This is where the monthly days inventory on hand KPI comes in handy. Let’s say you historically see a spike in demand around the holidays; monthly calculations will help you determine what kind of inventory moved in past years so you can more accurately forecast for the future. Your monthly days inventory on hand (MDIoH) will be a useful tool as you begin to reconcile what’s happened in the past with what will likely happen in the future.
MDIoH = (days in the month * (starting inventory + ending inventory)/ 2) /cost of goods this month
6. Picking Accuracy
Technology has done amazing things in the worlds of warehousing and order fulfillment, but even with automated robots and barcode scanners that can do the work of several humans, errors are going to happen on occasion. Between miscounts and misplaced barcodes, it’s important to understand why and how often picking errors occur.
Picking accuracy = 100 * error-free picks / total picks
7. Order Fill Rate
It’s not possible to achieve a 100% picking accuracy rating, but the closer you can come, the better—unless you consider that, sometimes, increasing your picking accuracy can ultimately slow down the order fulfilling process. This is a balancing act because you want to fulfill orders as quickly and as accurately as possible, but there are times when this can be a dance between one or the other.
In some cases, you’ll be able to fill orders right away, and other times, you might be out of stock and unable to take care of your customers’ needs immediately. Your order fill rate demonstrates the number of orders that are able to be filled immediately from existing stock.
Order fill rate = 100 * orders filled from existing stock / total orders
8. Net Promotor Score
Do you know how likely your customers are to recommend your company to their friends? If you don’t, you’re not using a net promotor score KPI. The net promotor score (or NPS) does exactly that—it tells you how likely (or unlikely) people are to recommend your brand to the friends and family members in their trusted circles.
The scores range from 10 (extremely likely to recommend your brand) to one (not likely to recommend your brand at all). The people who give you a nine or 10 are your promoters. Fence-sitters are your sevens and eights. Those who give you a six or less are your detractors.
Net promotor score = % promotors – % detractors
9. Return Rate for Product
You can often glean insights into your customers’ levels of satisfaction when you measure your return rate for product. If you’re seeing a lot of product returned, you need to examine the cause and take steps to rectify the issue.
As you begin to measure and monitor this metric, it’s important to track its trends over time. If the rate begins to increase, you should perform an investigate to figure out why right away.
Return rate for a product = value of product returned / total sales
Learn More About the Top Metrics Product Companies Should Be Monitoring
Every company should have a list of KPIs it tracks and analyzes consistently. If you don’t have a plan for collecting data and calculating KPIs, make one right away. When you use the right tools, you’ll have access to all the data you need (and more)!
With that in mind, we’ve collected a set of key performance indicators (KPIs) that every product company should be monitoring consistently. View them in our eBook now.