1. Inventory Turnover Rate
What it measures: How many times your entire inventory sells and is replaced over a period, typically a year. It's the single most-watched metric in distribution because it directly reflects how efficiently you're converting inventory investment into revenue. Use our inventory turnover calculator to see where you stand.
Formula: Cost of Goods Sold ÷ Average Inventory Value. If your annual COGS is $2.4M and your average inventory value is $400K, your turnover is 6.0 — meaning you sell through your entire stock six times per year.
What good looks like: It varies by industry, but most general distributors should target 6-8 turns per year. Fastener and hardware distributors often run 4-6 due to long-tail catalogs. Perishable or high-demand categories can hit 12+. If you're below 4, you almost certainly have a dead stock or overordering problem.
Why it matters: Higher turnover means your cash cycles faster. A distributor turning inventory 8 times per year gets their money back every 45 days. At 4 turns, that stretches to 90 days. That difference compounds across thousands of SKUs into hundreds of thousands in working capital.
2. Days of Supply (DOS)
What it measures: How many days your current on-hand inventory will last at the current rate of sales. While turnover gives you the annual view, DOS gives you the operational view — the one your purchasing team needs every morning.
Formula: On-Hand Inventory ÷ Average Daily Sales. If you have 200 units on hand and sell 8 per day, you have 25 days of supply. You can also calculate it as 365 ÷ Inventory Turnover Rate for the annualized version.
What good looks like: Your target DOS should be slightly above your lead time plus a safety buffer. If your vendor delivers in 14 days and you want 7 days of safety stock, target 21 days of supply at reorder time. SKUs sitting at 90+ days of supply with no seasonal justification are overstock candidates.
Why it matters: DOS connects your inventory position directly to purchasing decisions. It tells you which SKUs need ordering now, which are fine, and which you've over-bought. It's the metric that prevents both stockouts and overstock when reviewed daily.
3. Fill Rate
What it measures: The percentage of customer order lines fulfilled immediately from available stock, without backorders or partial shipments. Fill rate is the customer-facing side of inventory management — it measures how often you say "yes" to orders.
Formula: (Order Lines Filled from Stock ÷ Total Order Lines) × 100. If customers ordered 1,000 line items last month and you shipped 940 of them from on-hand inventory, your fill rate is 94%.
What good looks like: Top-performing distributors maintain 95-98% fill rates. Below 93% and you're likely losing customers to competitors who can ship same-day. For your A-tier SKUs (top 20% by revenue), target 98-99%. B-tier can run at 95%. C-tier at 90% is acceptable.
Why it matters: Every unfilled line is a revenue leak. But it's worse than that — in distribution, a single stockout on a critical part can send an entire order to a competitor. Contractors and maintenance teams don't have time to wait. They call the next supplier. Fill rate tells you how often that's happening.
4. GMROI (Gross Margin Return on Investment)
What it measures: How much gross profit you earn for every dollar invested in inventory. GMROI is the profitability metric that turnover alone misses. A product can turn quickly but at razor-thin margins, or turn slowly but at high margins. GMROI captures both dimensions.
Formula: Gross Margin ÷ Average Inventory Cost. If a product category generates $150K in gross margin per year on an average inventory investment of $60K, the GMROI is 2.5 — meaning you earn $2.50 for every $1.00 tied up in that inventory.
What good looks like: A GMROI above 2.0 is healthy for most distributors. Below 1.0 means you're losing money on that inventory — the carrying costs exceed the margin it generates. Best-in-class distributors achieve 3.0+ on their A-tier products. Use GMROI to compare product lines, vendors, and categories against each other.
Why it matters: GMROI answers the question that turnover can't: "Is this inventory actually making us money?" A product line with 8 turns but 5% margin might have a lower GMROI than one with 4 turns and 35% margin. It forces you to think about inventory as an investment that needs to deliver a return, not just product sitting on shelves.
5. Stockout Rate
What it measures: The frequency at which SKUs hit zero available inventory. While fill rate measures the customer impact, stockout rate measures the breadth of the problem across your catalog. A 95% fill rate could mean 5% of orders are affected, or it could mean 30% of your SKUs regularly run out but most are low-volume items.
Formula: (Number of SKUs at Zero Stock ÷ Total Active SKUs) × 100. Measure this as a daily snapshot or as a monthly average. Some distributors track "stockout days" — the total number of days any SKU was at zero divided by total SKU-days in the period.
What good looks like: Keep your overall stockout rate below 3-5% of active SKUs at any given time. For A-tier items, the target is near zero — these should essentially never stock out. Track which SKUs are repeat offenders. If the same items stock out month after month, your reorder points or safety stock levels need adjustment.
Why it matters: Stockouts have a compounding cost that most distributors underestimate. There's the immediate lost sale, the expedited shipping to fix it, the customer trust that erodes, and the operational chaos of processing backorders. Research from IHL Group estimates that stockouts cost retailers and distributors $1.14 trillion globally per year.
6. Carrying Cost as % of Inventory Value
What it measures: The total annual cost of holding inventory, expressed as a percentage of average inventory value. This includes warehouse space, insurance, shrinkage, obsolescence, financing costs, and labor for handling and counting. Most distributors know their inventory value but dramatically undercount what it costs to hold it.
Formula: (Total Annual Carrying Costs ÷ Average Inventory Value) × 100. Add up rent/space allocation, insurance, depreciation, damaged goods, theft, taxes on inventory, cost of capital, and warehouse labor. Divide by your average inventory value. Our carrying cost calculator can help you run these numbers.
What good looks like: Industry benchmarks place carrying costs at 20-30% of inventory value per year. If your number is below 20%, you may be undercounting (most commonly by omitting opportunity cost of capital). Above 30% signals inefficiency — too much space, too much handling, or too much obsolescence.
Why it matters: Carrying cost makes overstock tangible. When a purchasing manager says "let's just order extra to be safe," carrying cost quantifies what "safe" actually costs. At 25% carrying cost, every $100K in excess inventory costs $25K per year. That reframes every inventory decision as an investment decision with a measurable holding cost.
7. Dead Stock Percentage
What it measures: The proportion of your inventory value tied up in items with zero or near-zero sales over a defined period, typically 12 months. Dead stock is the most direct measure of capital waste in your warehouse. It generates no revenue, consumes space, and depreciates every day.
Formula: (Value of Inventory with Zero Sales in 12 Months ÷ Total Inventory Value) × 100. Some distributors use a stricter 6-month window or expand the definition to include items selling at less than 10% of their historical rate.
What good looks like: Best-in-class distributors keep dead stock below 5% of total inventory value. The industry average is closer to 15-25%. If your dead stock percentage is above 20%, you have a significant capital recovery opportunity. Even moving from 20% to 10% on a $1M inventory frees up $100K in working capital.
Why it matters: Dead stock is doubly expensive: you paid to acquire it and you're paying to store it. Combined with carrying costs of 25%, a $200K dead stock problem costs roughly $50K per year in holding costs alone — before you even account for the opportunity cost of that tied-up capital. Tracking this KPI monthly creates urgency around liquidation and prevention.
Putting It All Together
No single KPI tells the whole story. Inventory turnover without GMROI hides margin problems. Fill rate without stockout rate hides catalog gaps. Days of supply without carrying cost hides the price of safety. The power is in tracking all seven together and reviewing them weekly. Build a dashboard that shows these metrics at the company level, by product category, and by vendor. The patterns will tell you exactly where to focus — whether that's negotiating better vendor lead times, adjusting reorder points, running a dead stock liquidation, or shifting capital from C-tier items to high-turnover A-tier products using ABC analysis.