The Importance of Item Fill Rates and Inventory Management

The Importance of Item Fill Rates and Inventory Management

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Inventory control systems are incredibly important for any businesses that actively use warehousing services– primarily those in manufacturing and distribution. Warehouses are required to receive and store inbound freight for customer order fulfillment, and any projects that require warehousing are more than likely moving a lot of product. Sadly, frequent, large inbound and outbound movement of goods can lead to a lack of inventory management. Luckily, there are a few simple formulas and processes you can use to help improve your order fulfillment practices, such as item fill rates (IFR’s) and inventory management.

Before diving into item fill rates and inventory management, what they are, and how to calculate them, let’s set the groundwork for why they are important. Any business that handles a lot of inbound and outbound freight must understand that customer service does not stop at the end of a sale. In fact, most consumers perceive the customer service portion of the supply chain to start after the sale happens. Thus, all inventory management practices have a direct correlation to your company’s customer service levels. Bad inventory control means potential back orders, stockouts, and lost sales. Good inventory management means more product flow, increased sales, reduced inventory costs, and effectively managed logistics expenses. Item fill rates and inventory management can help in streamlining your warehouse operations and practices.

Item Fill Rates

Item fill rates are a simple way of measuring product stock against customer orders. It does not take into account backorders or stockouts, since this would infer a negative item fill rate.

To calculate an item fill rate, you need to know how many units of inventory were ordered by you as the purchaser, and how many units were ordered by your customers. Take the following example. Suppose you are in the business of selling tires. As the winter season rolls around, you order 800 tires to be safe. However, sales are lower than you expected and you only sell 552 tires. You calculate the item fill rate by dividing the number of items sold by the number of items purchased. So in this case, you would divide 552/800 and get an item fill rate of 0.69, or 69%.

If your item fill rate ever exceeds 100%, it means that you are backordering goods due to stockouts. This is never a good thing. Worse than having excess inventory is losing sales and customer service quality due to sales in excess of your inventory. Ultimately, the goal of any warehousing company is to have an item fill rate of 100% – no less, no more. But with the assumption in place that most companies will order more than they will sell, it is good to aim for the 85-95% range for a good IFR. Item fill rates and inventory management can be difficult if you don’t understand how this is done.

Inventory Management and the Product Lifecycle

The product lifecycle completely determines the demand that will exist for a particular product. Understanding the product lifecycle for your product, related products, and all products within your industry can help you to better manage your inventory levels and maximize your item fill rate.

The Product Lifecycle

Every product has a “lifecycle” that details what the demand of a product will be from start to end. There are 4 steps that characterize a product lifecycle:

  • Introduction: Research, development, and initial launching of a product are all part of the introduction phase. This can be thought of as the “beginning” of the process. For obvious reasons, product demand is relatively low at this phase. Even if product demand is at an all-time high in the industry, during the introduction phase of your product, consumer demand will be little to none. Thus, at this stage in the process, your item fill rate will probably never exceed 20%, but may even hover between 0-5%.
  • Growth: Growth follows the introduction of a new product. The degree of growth will be uncertain, but depending on your research of competitors, the industry, and related products, you should be able to loosely forecast what you can expect for sales in this phase. Every business hopes the growth continues to skyrocket, but at some point, it plateaus. This is the most volatile stage of the process in regard to your item fill rate. Depending on how optimistic you were and the rate of growth in product popularity, your item fill rates may be between 30%-100%+ (obviously, you want to avoid exceeding 100% and backordering products.)
  • Maturity: The maturity phase is a bitter-sweet stage. The growth of a particular product has stopped and sales have stabilized. Although the obvious drawback is an end to the growth phase, the maturity phase offers the benefit of predictability. At this phase, you should be able to maximize your item fill rates to upwards of 85-95%. Flow of goods and orders should be relatively predictable, thus reducing the probability of stockouts or excessive inventory.
  • Decline: The decline stage is the end of the product lifecycle. While product sales may continue to trickle, the market has begun to move to next generation products. At this point, companies should begin to sell the rest of their inventory and safety stock. Hopefully item fill rates rise from 85% until all units are sold. Effectively manage your product marketing to ensure postings are not listed once the item fill rate has hit 100%.

The product lifecycle is important to understand regarding item fill rates and inventory management, as it dictates the certainty/uncertainty and demand level of goods. By better understanding how your item fill rate will respond to each stage of the process, you can improve your inventory management practices and streamline your warehouse operations.

Conclusion

It’s simple but it’s not easy. That’s the best way to describe item fill rates. While the concept is not difficult to understand by any means, managing it can be. Effectively controlling your inventory to match item fill rates at an appropriate level is complicated and stressful. Much of it boils down to having a good grasp on the product lifecycle.

When is your product being released and how much inventory do you need in stock before release? Based on product market research and the industry, how fast and to what degree do you expect product sales to grow? When product sales have stabilized, how can you maintain a consistent flow of goods and maximize your item fill rate and inventory management? What’s your exit strategy?

A good item fill rate rests right between 85-95%. Item fill rates and inventory management are incredibly important regarding customer service and sales. You never want to stockout or backorder products, as it negatively affects your company’s customer service level and is a cause for lost sales. Anything below 85% and you are sitting on non-liquidated products and are losing money. Anything above 95% and you are entering the danger zone of stockout. Make sure to do your research and analytics to get the best insight into your forecasted product sales. Simple tools such as the item fill rate can help you with effective inventory management.

If you have any questions about item fill rates and inventory management, give us a call and we would be happy to help! We have aided many companies in finding efficient and effective warehouse solutions and are happy to share our thoughts!

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2 thoughts on “The Importance of Item Fill Rates and Inventory Management

  1. Thanks for helping me understand the importance of good inventory. Like you said, it can help with the flow of the product which can increase the sales. With that in mind, I would have to suggest to my husband that we hire an inventory expert to handle the two convenience store that we are going to put up within this year. Since we are not really businessmen, this tip will assure us that our store will be properly run. Thanks!

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