Rental Inventory KPIs and Metrics

Karri: Hello, I'm Karri Hiekkanen, the host of Recommerce Podcast. And I'm Tuomo Laine, the CEO and co-founder of TwiceCommerce. Today, we're going to talk about rental inventory and some KPIs, how you can examine how your business is doing from the inventory side. So Tuomo, what are the most important KPIs for your rental business inventory?

Tuomo: I'd start with three concepts. So you need to track your overall stock balance, meaning that how many items do you have in stock and kind of in your ownership. Then you need to track out of those. You need to have an understanding of how many of those items is available to be sold or rented or booked and how many of those items are currently committed to something could mean a booking. It can mean a maintenance or inspection flow. But with those three KPIs, you can for any given time point see how much stock do you have? What's the stock balance? How much do you have on hand? How many of those items are available to be sold or booked forward? And then how many of those items are currently committed to something? So these three numbers inform you when it comes to figuring out how to schedule your maintenance is or how to, whether you can book or not book items. These are really kind of the core numbers there.

Karri: In rental businesses, situation can change quite a lot like depending on what type of time frame you're looking at. So if you're looking at one day, a one item can have, for example, one booking. But if you look at a week or month or a year, it can have multiple of these events. So I guess the time frame or are you looking at a snapshot of point in time? Or are you looking, for example, 30 day period kind of affects these calculations a lot?

Tuomo: Yeah, for sure. So for example, in twice, you can always look at a snapshot on any date, time situation, or you can look at a timeline view where you can see all of these numbers evolve over time. And in that timeline, you can define what's the granularity like you said that you're looking at. So for example, if you're looking at a daily view, you see an hour by hour situation of your inventory. Now, inside, for example, a day, like you said, I can have multiple bookings or maintenance events as commitments that eat out from the available to sell a stock. So that's why usually software like twice, we try to show you for that time frame, the mean max values that you have. So instead of just showing you one number, we show you that, well, in inside Tuesday, the minimum number that you have available to sell is two and the maximum is six. Because there might be four bookings or four other commitments, maintenance and bookings overlapping and eating out, for example, out of a stock balance of six, they eat out four at maximum. Now, in order to get a deeper understanding, there's usually software like us that help you also in that same view often see then these events as kind of in the timeline as as actual like bookings or kind of with the exact start and end time. So you can do a little bit of a more precise deduction of why is my availability to sell on the level that it is.

Karri: I guess the mean and max and overall the timeline view is really important when you are running the business. So you can say at any given time if I have some inventory available for for a booking, for example. But what does these numbers tell you if you're looking at, for example, in a 30 day period like mean and max.

Tuomo: So from these numbers, you can start to deduce your utilization. So kind of how well is your inventory being utilized for whatever whatever commitment there might be, or whether it's sitting in your storage doing nothing. And that's doing nothing at time is kind of the costly element in most of the rental business model. So you really want your inventory to be committed and doing something. And then there's a few ways of how we can start to look into utilization. But kind of the, let's say, mathematically most precise way of doing is that looking is looking at this kind of continuous utilization rate. So if you have one item and you want to understand its utilization for a day, you look at that day, the start and end of it kind of at 24 hours. And then you just look like that at how many hours or for how long that item was committed during that day. That's imagining that it sums up to 12 hours. So then I have a utilization rate of 50% for that day. So it just gives you an understanding of how much time your item is working for some commitment versus being idle in your in your storage.

Karri: What is the other utilization you mentioned? So if this is the mathematical model, what is the other one?

Tuomo: Yeah, I need to correct myself. I think all of these are mathematical. Maybe the difference is in how precise of a description it tries to achieve on the world. But yeah, the other way is then looking at instead of like a continuous utilization rate, looking more at like a period based activity rates. And what that tries to say is that you first have to select a period inside which you're trying to figure out the activity of an item. So that period could be a day or a week or or an hour, for example. And then you just count whether that item was active inside that period or so whether it had a commitment inside that period or not. If it had, you count that it had like 100% utilization or activity inside that period. And if it didn't, it had 0% activity. So that then tells you the activity rate of your inventory. So in some business models, it might be more reasonable to look at whether this item was committed for something during the day. And that's enough. You don't have to know how many milliseconds out of the day it was actually used. It's just enough that, you know, this trailer, it went out for one rental during the day and we're kind of happy with that knowledge. So it had it accumulated 100% utilization or activity for that specific day. So these are kind of two different ways of looking into the inventory. They are kind of measuring the same thing. They're measuring the activity or utilization of your inventory, but maybe aggregating the image a bit on a different level. Gladly, software like TWICE allows you to do both of these very easily at the same time. The limitation often is that some system are not able to do this continuous utilization calculation because that is a bit more challenging as it's... And also in the activity rate based calculations, some systems lack the capability of showing you activity rates for very dynamic time periods. So it often might be that, all right, the system has been built for daily time periods and that's pretty much how you track your stock on a daily levels. Whereas with software like TWICE, you can on the flight based on case by case, you can always look at the data even on a like a hourly minute level daily, weekly, monthly. And look at both of these KPIs without having to have chosen a specific way to go about things.

Karri: Makes sense to have both of these approaches, especially for, let's say, rental businesses that have very flexible time frames that the customer can actually select like how long rental do they need. Because the other one, like some things are just not under your control is that is the customer renting it out for an hour or for eight hours or similar. And I guess they both kind of give you some kind of understanding like how is my inventory used or is it just sitting still and then maybe the other one is actually giving you some tips that maybe I should try to only have three hour rentals rather than one hour rentals or similar.

Tuomo: Yeah, definitely. It's like in many of these cases, being able to get this kind of a snapshot or continuous view to your inventory, it can kind of hint you towards some hidden value or hidden opportunities. So you might look at, for example, in twice 2.0, you might be able to kind of filter that I'm a product category or stock item category that you're interested in. And then you might notice inside there that you have items that have only 20% continuous utilization rate, but then like 100% activity rate. So then you might want to look at those items, what are they connected to, how are you how are you practicing them? Are you adding overly secure buffer times and maintenance times to them? Or like, is there some element that is preventing them? Is your productization such that, like you said, if I would do a bit shorter rentals or maybe I should settle longer rentals, I would get more usage for these items or more committed commitments for these items. So these are very nice ways on like looking into the data and starting to fish for insights on where do I have hidden value or where do I have operational inefficiencies that I might need to improve in order to improve my overall performance.

Karri: Okay, so now we have the, let's say, basic KPIs, so how much you have in stock, how much are available for bookings, rentals, and how many have some type of commitments and then utilization rate, which is kind of telling you how well your inventory is performing. And there are a couple of different ways to calculate it, maybe depending on your business model. And in some cases, it's nice to look both of them. Are there any other important inventory metrics or KPIs that maybe almost all rental businesses should look into?

Tuomo: Yes, there are a few. There's, for example, value tracking is an important one. So just tracking the value of how much you have tied in your inventory. So how much you've paid for the items, the stock that you're currently holding, that kind of informs you on how much capital you have tied in those assets, like factually, then you might want to track the actual like potential reason value of those items, because then that informs you on like whether that tight capital that you've invested in cost is potentially something that you can turn into more liquid cash to buy new stuff at any given moment, or whether it has no reason value, for example. And then you want to track probably not only the value, but the actual like then cost and income drivers. So the kind of overall profitability of your inventory. So those items that you have in your inventory, how much have they occurred in costs, which can mean things like labor time or maintenance costs or spare part costs, and how much have they generated in income through the bookings and the rentals they've been attached to. So that gives you a picture of your overall profitability of your operation. Now, I think these are kind of important aspects to look into when assessing your overall profitability and the value of your inventory, which will help you make, again, better purchasing decisions and better commercialization decisions and pricing decisions as you really understand your operation in detail. And then well, one thing that I want to mention, you probably also want to look at kind of the life cycle of your items. So if you would be a resale operation, you might look at the turnover speed. So how quickly the assets actually get sold after you've purchased them in rentals kind of by definition, you're not much in a in a like a quick turnover business. It comes with the assumption that when you're doing rentals that you will hold on to your inventory a longer time. So thus the overall profitability is a very important thing to follow. But still at the end of the day, there will be times when you end up making the decision that now it's time to sell my rental fleet to kind of free first them to be new ones. So over time, you might still want to look at a thing like an inventory turnover rate to understand how long do you usually end up kind of tying capital to your inventory over time. It is still a relevant kind of measurement or KPI to look at to understand your long term kind of asset management side of things.

Karri: I guess also related to the asset management, then maybe if you have taken some loan and you have some interest occurring also quite interesting metric could be like the payback period. So when are you kind of paid back the initial purchase and when it's starting to generate basically profit and after that maybe you have been able to, for example, pay off the loan.

Tuomo: Exactly. So it is these are all of the drivers that are very important for the overall assessment that will inform all of your decisions all over your business operation. And then software likes wise. The reason why we've invested time and effort in making it very easy to, for example, to update a stock item attributes with APIs and so on is that these interest payments or interest rates they change over time. And you might want to still try to, for example, log financing expense for that item, let's say every quarter or so and you have some automation or Excel for that. So the more accurate picture you're able to build usually the better decisions you're able to make for your overall operation.

Karri: And are there any like inventory quality metrics that rental businesses should be focusing on like the accuracy of your inventory in in twice or other inventory system?

Tuomo: Yeah, inventory accuracy is an important metric. And especially with rentals, it's an interesting topic because it's kind of most rental operations as they start to use a solution like twice. One of the big drivers for them to move out of, I don't know, pen and paper or some old school system is that they want real time availability knowledge in all of the sales channels that they're selling in. So they're selling at online and in a marketplace and in store at the same time. So in order to do that kind of shuffling, you kind of need to have inventory accuracies. The representation of what's actually currently committed and what's available is sold needs to be up to date all of the time so you don't get double bookings or you don't oversell unless you willingly want to do that. So in theory, you are driving for 100% accuracy in order to run that ship. In practice, you might have that, but things still happen, things break down, a customer returns a broken item or item gets stolen. There are always periods in which kind of the information is not fully translated. So then the question really comes to not necessarily on what's the overall accuracy of the situation, but like how quickly can I store the accuracy and how quickly can I deduce that as I stored the new state of the inventory. So I marked an item, for example, to be stolen or it had to go to a maintenance. How quickly will I see the impact of that? So whether I have no bookings that are overbooked and I need to resolve these issues somehow, that is an kind of inventory accuracy is a very big driver in rentals overall. And as you are evaluating different solutions for your rental business and when it comes to inventory management, probably one of the key criteria and qualifications that you want to look at is that looking at the solution, will it allow you to have real time inventory accuracy and being kind of sober in the sense that that accuracy is very dependent on probably your employees or operative employees actually marking the things into the system as they happen. So no system can just automatically know that something is now broken unless it has some IOT in it. So with most item categories, someone actually has to mark a bicycle to be broken. So then you need to evaluate the usability and the UX of those solutions that how easy is it for your employees to do these jobs. Are these things that they can do on the fly continuously as they are running the operation? So you kind of have continuous inventory accuracy. Everything is updated as things happen. Or are these jobs that are somehow kind of cornered or kind of only available for a certain role, which means that instead of your operative employees doing it continuously, they just report these things to on someone else's table who does this at the end of the day or at the end of the week, which immediately would mean that your inventory accuracy is kind of always out of date at least by one day or one week. And then often that leads to situations where you have to start adding a lot of buffer times to your operation, which eats out the practical utilization and eats out from profitability as items tend to sit longer times in idle stage in your warehouse rather than driving revenue. So inventory accuracy and the easiness and effortless effort level of what it takes for someone to keep that up to date is very connected to your overall profitability as a business.

Karri: Okay, that was a nice overview of all the basic KPIs that you should be looking out for as a rental business. We are planning to have another video which is more on what type of questions you can ask and how you can optimize your inventory based on different KPIs and data. For now, thank you Tuomo a lot for sharing your knowledge.

Tuomo: Thanks Karri.