Healthy inventory is the core of a successful rental business. But how should you know whether or not your inventory is healthy and performing?
Tracking and measuring the right inventory metrics offer valuable insights into the overall performance of a business. The different metrics and KPIs provide a better understanding on the quality of the inventory, as well as how efficiently the business uses its resources.
After all, the equipment in the inventory is the most important source of income for a rental business. In this blog, we will take a dive into inventory metrics and tell how they help tracking the health and performance of a rental inventory.
Inventory performance metrics
Number of rentals
The number of rentals is one of the simpler yet important inventory metrics for rental businesses. It can be measured on an individual product level or including every product in the inventory, depending on the use case at hand.
The number of rentals also works as a basis from which multiple ratios and other metrics are derived.
Revenue per unit
Revenue per unit tells how much a single product generates revenue on average at the selected time period. It is natural that different products have different values for this metric.
Here is how to calculate revenue per unit:
Revenue per unit = total revenue of a product for a period / avg. number of products in the inventory during the period
Together with other inventory metrics, revenue per unit can help you prioritize your future product acquisition decisions. Moreover, revenue per unit sets a sustainable cost limit for each product.
Typically revenue per unit is calculated separately for each product type.
Financial utilization rate
The financial utilization rate tells how well a rental business is able to turn the time and monetary investments into income. In essence, the metric measures the revenue produced by individual products or items in relation to the costs attributed to the product.
Here is how to calculate the financial utilization rate:
Financial utilization rate = The annualized rental revenue / (the total acquisition + maintenance costs)
Financial utilization is essential for estimating the profitability of a product. The number helps to recognize the best performing products, categories, and services from the not-so-well performing ones.
The financial utilization rate is a great indicator of the demand for different products and services and offers insights into your customers’ preferences. In addition to providing more understanding to the customer segments, knowing the rate at which your inventory generates income in relation to the costs can help determine what type of equipment your business should invest in and add to the fleet.
Inventory turnover rate
For a rental business, inventory turnover rate means the number of times it rents out its whole inventory during a certain time period.
Inventory turnover rate = Number of products rented during a period / Avg. number of products in the inventory during the period
Inventory turnover rate tells about the overall demand and efficiency in rental processes, which often translates to profitability.
Time utilization rate
The time utilization rate is the ratio of how many days a piece of equipment is being rented out in relation to how many days it sits unused in your inventory.
Time utilization rate = Rental days / Days available
This is actually one of the more important inventory metrics a rental business should track, as a piece of equipment is solely a cost when it is unused. It is basically a waste of money to carry equipment with low utilization rates.
In the first calendar, you can see that the time utilization rate is 5/21=0.24, while in the second one it's 16/15=1.07, and last one, it's 31/0=∞.
A meaningful benchmark value for time utilization rate depends on the product because some equipment, such as skis, are highly seasonal by nature, whereas demand for tools can be more or less year-round. An acceptable level for time utilization rate is also affected by the storage and maintenance costs of the product as well as the rental fee. For a low maintenance, easy-to-store product, it is more justified to accept a lower time utilization rate.
Below you will find a formula that can help to define an acceptable time utilization rate level:
One day rental revenue of a product * (rental days / days available) > One day storage and maintenance costs of a product * (days available / rental days)
If a product is not generating the wanted results, it is time to sell it off rather than keep it in your inventory.
Physical utilization rate
Where time utilization rate tells the ratio between a product’s active and inactive days, physical utilization rate tells the share of active rental days of a product in relation to all potential rental days.
In other words, a high physical utilization rate means the business is holding on to the inventory for a shorter amount of time, thus performing better. It indicates that the business is efficient when it comes to utilizing its inventory, which results in potentially higher profit.
Low physical utilization rate, on the other hand, means the business is struggling to keep their inventory in frequent and efficient rotation. In the retail world, this would mean that the business is struggling to clear its inventory. In either case, this could mean that the business has miscalculated and invested poorly in inventory.
Here is how to calculate the physical utilization rate:
Physical utilization rate = active rental days / potential rental days.
Keep in mind a large inventory in both retail and rental cases is not necessarily all bad for business: this could all be in preparation for sudden increases in demand. This is not unusual, especially for businesses that operate in seasonal industries like ski resorts or water sports rentals.
In the first calendar, you can see that physical utilization rate is 16%, while in the second, it's 51%, and last one 100%.
Note: You do not get active rental days and potential rental days directly by looking at the calendar. To calculate the active rental days and potential rental days for your inventory, you have to take the number of products into account.
For instance, if your season is 100 days long and you have 10 products in inventory, your potential rental days is 100*10=1000. Active rental days, in turn refers to the combined number of days these 10 products have been rented out.
Operational inventory metrics
The cost of inventory
Rental business’ inventory costs include much more than the price of the rental equipment. The costs of the inventory can be divided in three main categories: order or acquisition costs, holding costs, and shortage costs. Below we list the main sources of inventory costs.
Cost of finding suppliers
Cost of transportation
Receiving costs – Unpacking, inspecting, assembling, etc.
Financial costs – Everything related to financing your rental equipment. Loan repayments and interest fees, for example
Storage space cost – Lease payments if the space is not owned, property taxes, electricity, heating, water, etc.
Inventory service cost – Physical handling of the products (e.g. maintenance), insurances, security, software applications, and hardware.
Inventory risk cost – Shrinkage which refers to stolen, disappeared, or damaged equipment.
Stockout costs – Lost sales opportunity because of products being out-of-stock
Customer loyalty and reputation – Stockouts do not only lead to lost sales but also to potentially lost customer loyalty if a company repeatedly fails to answer customer demand.
Emergency supplements – Sometimes rental businesses rent equipment from their competitors to be able fulfill customer demand. These expenses are included in the shortage costs.
Inventory carrying costs
Inventory carrying cost stands for the percentage of overall value a rental business pays to maintain inventory in storage. In addition to unused (and unsold) products, it takes into account warehousing costs, insurance, rent, and labor costs.
In other words, the metric shows how much the products in the inventory cost for a business in relation to their value. Calculating inventory carrying costs helps figure out if a business should trim its inventory costs. This can be achieved, for example, by evaluating the lease contract of inventory space, insurance contracts, maintenance costs, and other aspects causing warehousing expenses.
Here is how you can calculate the inventory carrying costs:
Inventory carrying costs = (inventory service costs + inventory risk costs + capital cost + storage cost) / total inventory value x 100.
Low inventory carrying costs translate directly to the profitability of a business.
The maintenance-to-income ratio is, as the name suggests, the ratio between how much resources are being spent on an individual product’s maintenance and how much revenue the said product is bringing to the business.
The basic idea of any business consists of two things: being profitable and meeting the customer’s expectations. A piece of equipment that is unreliable and requires a lot of maintenance is not useful for a rental business.
Let’s take a bike rental business as an example, it wouldn’t necessarily make sense to acquire the most expensive, high-tech bike that requires a lot of maintenance and runs a big risk of breaking after a large number of different renters.
Instead, it would make sense to purchase more durable bikes, which have the most accessible spare parts, require less maintenance, and have good resale value. Being on-trend and offering the latest equipment can be a long-term goal and investment, however, if the maintenance-to-income ratio is off and the company is losing money, it’s just bad business.
One way to ensure a good maintenance-to-income ratio is even before acquiring products is taking into account the type of equipment that is being purchased, its average fleet age, lifetime value, maintenance costs and costs for spare parts, and so on. Staying on top of this information before and after acquiring equipment will help with managing the inventory and replacing the equipment that’s costing more than bringing in.
Maintenance-to-income ratio = Total revenue generated by the product / Total maintenance costs of the product
Labor cost per rental
Labor cost per unit in the manufacturing industry translates well for the needs of an equipment rental business. Where a manufacturing company wants to know how much it costs to produce a single unit of a product, a rental business wants to know how much it costs to prepare a product for rent and clean it up and maintain it after the rental.
Here's how to calculate labor cost per rental:
Labor cost per rental = total number of rented products / total labor expense.
Calculating labor cost per rental doesn’t only showcase the efficiency of the personnel but also the overall efficiency of the different rental processes. If the labor per rental requires too many resources (taking too much time, that translates into higher labor costs), it might be a sign of inefficient rental processes that could be improved. This could be anything from automating inventory management and scheduling or accepting bookings and payments in advance through your website.
Stockouts refer to situations where a customer is placing an order, but the transaction is prevented because all or some of the products included in the order are out of stock. The number tells about the company’s ability to answer customer demand.
A high stockout rate signals too low inventory levels, inefficient maintenance processes, or sub-optimal scheduling, which independently or together lead to lost sales due to products being unavailable for rent.
Rental businesses can improve their stockout rate by either adding more equipment to the inventory, enhancing the maintenance processes, or automating the scheduling. Solving the main reason leading to the problematic stockout levels is crucial. Otherwise, you might end up fixing an area of business that is not broken.
Because it is almost impossible to recognize every single canceled order caused by products being unavailable, the metric can be calculated with the following formula:
Stockout rate = Number of out-of-stock days * Average number of rentals per day / Total number of fulfilled rentals
Inventory health metrics
Inventory value tells the worth of the physical assets a rental business has in its inventory. Calculating the inventory value is mandatory for any business because of accounting reasons.
Note: The inventory value in the balance sheet does not always match with the resale or utilitarian value of the equipment.
A healthy rental inventory consists of a balanced amount of new and old equipment. Fleet age measures the average age of your equipment fleet from the day it gets put into use.
Different products have different expected lifetimes, which can be seen, for instance, from the given factory warranties. Fleet age is essential knowledge for a rental business because it helps to estimate how many productive days, months, or years a product has left as rental equipment.
The older and more worn each equipment gets, the more it requires maintenance, making the product less attractive to be kept in the inventory cycle. Fleet age helps to estimate the potential income the product still has left and how much it costs (e.g. in form of maintenance) to keep the product functional. This again helps to evaluate whether it’s more profitable to continue renting the equipment or is better to give the product a new life and sell it.
Inventory renewal rate
Inventory renewal rate reflects the ratio in which the items in your stock change (and renew) over the course of a reference period. It takes into account the sold and newly acquired items that are either removed or added to the inventory.
A benchmark value for the renewal rate depends on the rental industry as some equipment are more durable and long-lasting than others. Your current fleet age and the average lifetime of your inventory give you a directive estimate of how big a share of your inventory you should renew each year.
For example, an equipment rental company with three years of an average inventory lifetime should aim for approximately 30% inventory renewal rate each year in order to keep the capacity unchanged.
Here’s how to calculate the inventory renewal rate:
Inventory renewal rate = New equipment / (Old equipment + New equipment - Sold equipment)