1. Out of various theories of inventory performance measurement suggested in literature and research papers whether the one chosen by an organization is producing desired result or not can only be ascertained if certain performance parameters are fixed and the same are evaluated on periodic basis.

Inventory Performance measurement is a necessity as it would indicate as to how good or bad is the inventory management being carried out by an organization. It would also give opportunity to compare various performance indicators with same of the benchmark company in similar industry.

Key indicators may be classified as under:

1.1 Financial indicators 

• Inventory Investment 

nventory investment is basically the expenses met for acquisition of inventory. Whereas higher investment in inventory may improve Fill Rate ie fraction or percentage of demand that is actually met, the downside is that it may block more funds which is not available for alternate application. To check if there is right amount of stock inventory one way is to compare the value of current inventory to an “ideal inventory investment.”
To calculate the value of “right” amount of inventory. requires first to separate the inventory items with (i) recurring demand items and (ii) sporadic usage items.

• Recurring Usage Items 

Recurring usage products are used on a regular basis. Typically these items:

• Have had usage in at least eight of the last twelve months.
• Have had usage in at least four continuous months in the last twelve months (This condition identifies seasonal items that are only used during certain times of the year).

Replenishment of these items is normally based on safety stock quantities, order points, line points, and standard order quantities:

• Safety Stock Quantity: The “insurance” inventory maintained in stock to protect from stock outs resulting from unexpected customer demand or vendor shipment delays.
• Order Point: The Safety Stock Quantity plus predicted demand during the anticipated lead time.
• Line Point: The Order Point plus predicted demand during the supplier review or order cycle; the normal length of time between typical replenishment orders with the supplier.
• Standard Order Quantity: Is the minimum quantity that can be ordered once .

Replenishment orders are typically placed with a supplier when the Replenishment Position (On Hand – Committed on Current Outgoing Orders + On Current Incoming Replenishment Orders) of an item is between its Order Point and Line Point:

Figure 1(a) Estimation of ideal inventory investment

Stock receipts for these replenishment orders will normally be received when the replenishment position is somewhere between a point equal to the Line Point –