What is the KPI for Inventory Variance Each Year?

A Contractor University Member recently utilized the Ask-The-Expert Q&A feature within the member dashboard by submitting the following question and received the response below.

Contractor Question:

“What is the key performance indicator (KPI) for inventory variance each year? Specifically related to adjustments made when our inventory count reveals we are off from what our expected levels are.”

Contractor University Expert Response:

“There is no KPI. A KPI is a vetted figure over decades and over many markets. Since inventory is a choice and not a requirement, we cannot produce a specific KPI. I can help you identify a measure or metric for your company – based on strategy.

Inventory turns in HVAC overall should be around a 6 – see the ratios in the business planning tool. Working capital, which contains inventory, should be 10-15% – supporting 6 turns of inventory.

Also, if a supplier comes to me and says buy 98% furnaces for $500,000 and I buy $1,000,000, I will not turn 6 times but my ROI will be sky high since that will be turned into a pile of cash flow.

So one balances the cost of inventory with the need to have inventory today with the ROI of inventory. Basically 3 variables – like playing an instrument – some creativity and discernment in that equation.

I personally carry about 30 days worth of inventory on a rolling plan with a supplier who is trusted. But we will buy low and sell high if we have an advantage to do so.”

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Want to read more real contractor questions and the expert responses? Our faculty members have also answered questions on other related topics, including Training Service Techs in Customer Service and What Should Technicians Do Before Leaving A Service Call.

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