A fundamental reorder method has been introduced for various ERPs and other kinds of inventory management applications in the Min / Max inventory ordering system. The value of ‘min’ reflects a stock amount that causes a reorder and the value of ‘max’ represents the new stock level after reordering. The difference between the Max and the Min is often viewed as the EOQ (Economic Order Quantity).
This is the best inventory control approach. You only draw two lines that are for maximum and a minimal inventory quantity. If your inventory crosses the minimum line for a certain product, it is time to reorder. But, more than the full limit, you cannot request additional purchase. This method is simplistic and can have both positive and negative impact. If data points are not properly analysed for use, obsolescence, strategic need, then there can be issues like either shortages or overstocked items.
The ability to better predict consumer demand, decrease product cycle times and ensure a high probability of sales by carrying common parts needed by several customers, are required to improve inventory turnover rates.
Below are some of the best practices that need to be followed in ascertain the minimum and maximum inventory levels.
1. Evaluation of Cycle Times and Seasonal Demand Models
Take the time to split your inventory into its most common parts. Assess the cycle times for each product and the inventory turnover rates.
2. Sales forecasts and manufacturer provided lead time accuracy
The trick is to start your sales forecasts with those quantities that are guaranteed to sell your product. Stock replenishment must always take into account the lead times, or turnaround times, from suppliers.
3. Managing quarterly inventory volumes
If your company faces unpredictable quarterly sales and is uncertain on the month those items need to be purchased, take the time to change your inventory (minimum level) accordingly and calculate your inventory requirements by the quarter.
4. Establish the grading system for the product
To decide on the time that your company has to hold an inventory, create a product grading system based on the popularity of the products.
When deciding the minimum stock amount, the following considerations are to be taken into account:
1. Lead time
A purchasing firm needs a certain amount time to complete the order and the supplier / seller also needs time to carry out the order. This is termed as lead-time since this is the time taken to process the order and then to execute. In order to meet production requirements, it is essential to keep some inventory in this period.
2. Rate of consumption
The consumption rate will be determined based on the amount of products / parts consumed over a specific period of time and also based on future plans be it seasonal or for expansion / higher production.
3. Nature of materials
The kind of products and nature of materials also determine whether or not minimum order quality needs to be maintained. If the materials are specifically ordered only against customer orders, then for those minimum level need not be maintained.
4. Re-ordering Level
The level of reordering is set between the minimum and the highest level. The usage rate, the number of days needed to replenish the stocks, and the maximum quantity of materials required on any day are taken into account, when setting the reordering standard.
Minimum stock level = Reorder level – {mean use x average lead time}
The maximum level of inventory would depend on the following factors:
- Capital availability to buy the materials in the business.
- Maximum material requirements required at any time.
- The availability of space for in warehouse for storage of the goods.
- The cost of maintenance costs of the stores.
- The capacity for price swings for different materials.
- The potential for technology changes will also impact the maximum level.
Maximum level of stock = level of ordering + quantity of ordering – (minimum level of consumption x minimum time of ordering)
Significant advantages
- Know real-time inventory or surplus numbers.
- For each inventory object, set custom stock limits and controls to get deeper insights.
- Inventory levels at specific locations.
- Display your dashboard or notifications for Min / Max information for quicker action.
- Batch product intuitive rearrangement.
