Inventory management can be a tricky balancing act for any lumberyard. It’s important to avoid overstocking and raising carrying costs, but you can’t risk running out of product and disappointing expectant customers. Understanding the inventory metrics every lumberyard should track is essential for avoiding tipping too far in either direction. By monitoring these key performance indicators and partnering with reliable suppliers like BPI, your business will thrive by caring for your customers while improving profit margins.

Why Inventory Metrics Matter for Lumberyards

Partnering with BPI allows you to keep a close eye on key metrics and improve your inventory management, which will impact several key areas of your business, including:

• Operational efficiency. When you know exactly what’s happening with your inventory, you will uncover opportunities to improve your processes and make your warehouse more efficient.
• Customer satisfaction. Optimizing your stock levels will help you avoid back orders that make customers dissatisfied and likely to look elsewhere.
• Financial performance. High carrying costs may prevent back orders and stock outs, but they will also erode your margins. Paying attention to inventory metrics – and making decisions accordingly – will help boost your profitability.
• Meeting industry challenges. Building material dealers have their share of unique challenges, such as fluctuating seasonal demand and storage limitations. Working with BPI will allow you to dig into the numbers and uncover ways to deal with these challenges and gain an advantage over your competition.

>> The True Cost of Holding Inventory: Factors That Affect Profitability and Total Cost of Procurement

So, which inventory metrics are most vital?

Essential Inventory Metrics Every Lumberyard Should Track

Inventory Turnover Ratio

Among the inventory metrics every lumberyard should track, the inventory turnover ratio stands out as particularly crucial. This metric measures how often a company turns over its inventory over a specific period. It’s calculated by dividing the cost of goods sold by the average value of your inventory. A low ratio could signal an excess of inventory, while a high ratio could mean you don’t have enough inventory. Ideally, a flexible approach to inventory that can ramp up and down with sales will keep this ratio in a comfortable Goldilocks zone—”just right.”

Reorder Point (ROP)

The reorder point is when your company needs to re-up the inventory of a particular product. Obviously, it can’t be zero because any order will require lead time, during which more of that product could be sold. To determine your ROP, measure the typical sales of a product during the amount of lead time required to replenish your stock, and then add the safety stock, or minimum level of inventory needed to avoid a shortage. If you can anticipate reaching your ROP far enough in advance, you can place an order at the right time to keep things moving efficiently.

Days Sales of Inventory (DSI)

Days sales of inventory (also known as the average age of inventory) measures how long it usually takes for your lumberyard to sell its inventory. You can find this ratio by dividing your average inventory by the cost of goods sold, then multiplying that figure by the number of days in the period you’re measuring, such as 90 for a fiscal quarter. The smaller the ratio, the less cash you have tied up in your inventory, which means better cash flow and liquidity. If the ratio is high, it indicates that you’re having trouble moving your inventory in a timely manner, which could be happening for several reasons, including a lack of demand for a given product. For wholesale companies, a DSI ratio of 30-90 days is considered good.

Gross Margin Return on Inventory (GMROI)

Gross margin return on investment measures how profitable a product or group of products is. If the ratio is 1, you’re breaking even. Ideally, the ratio should be high enough to indicate a profit after accounting for costs. To calculate GMROI, divide gross profit by the average inventory cost. The key is to align stock levels with revenue goals by carrying profitable products as much as possible.

Stockout Rate

The stockout rate shows how often a customer tried to buy an item when it was out. It’s a concrete way of measuring opportunity costs—each failed purchase is a precise amount of revenue lost. Obviously, you want this figure to be zero, but the average stockout rate is about 8% in many industries. If a product has a high stockout rate, that’s a strong indication that it’s popular enough to be worth increasing your ROP. Stockout rates can also fluctuate with seasonal demand, so if you can pick up on a pattern, you can scale your ROP up and down accordingly.

Carrying Costs of Inventory

This measures how much it costs to keep products on the shelf. There are several factors, including storage (each square foot of warehouse space costs money to rent and maintain), insurance (the more product you carry, the more you have to spend to insure against potential damage and events like natural disasters), and depreciation (if a product sits for too long, you may have to mark it down to move it). Overstocking may feel like a “better safe than sorry” move, but you could still be sorry if those costs get too high. Carrying costs are always expressed as a percentage of the total value of inventory, so you’ll have to calculate that figure first.

Partnering with Trusted Building Material Suppliers to Optimize Inventory

When you hunt for a bargain on each product you carry, managing inventory can get extremely complicated. You could easily end up with too much stock because you loaded up on a product when a supplier offered a limited-time deal. But if you partner with a single supplier, things get much simpler—and ultimately more cost-effective.

At BPI, we offer:

• Just-in-time delivery services that reduce your need to carry a lot of inventory on site. In other words, we carry it for you—and then deliver it exactly when you need it.
• Customized supply solutions tailored to your specific inventory and demand needs.
• Advanced forecasting tools that can help you anticipate market fluctuations and make your warehouse more efficient.
• Bulk purchasing discounts and shared storage options that can further reduce your purchasing and carrying costs.

Our value-added services help lumberyards grow. We will help you stay on top of your inventory metrics, reduce carrying costs, and improve the reliability of your supply chain. To learn more, contact BPI’s expert team today.