Understanding and maintaining inventory levels is critical for effective logistics operations. Minimising stock shortages and excess inventory can significantly decrease the overall inventory expense by up to 10%. It can help you lower operating costs and guarantee efficient shipment of orders and minimum disruptions. Regardless of the kind of business you own, effectively controlling inventory levels is a critical tool for good business management.
As you expand your sales channels, determining the optimal inventory balance gets increasingly difficult. According to a McKinsey report, a considerable majority of organisations, (about 58%) emphasise inventory optimisation to retain their brand image while controlling expenses. Regardless of the kind of business you own, effectively controlling inventory levels is a critical tool for good business management.
Now, let’s explore more about optimal inventory levels.
Inventory Levels: A Broad Understanding
Inventory levels are the number of items that a firm has for distribution or sale at any particular time. It assesses the inventory in the company’s storage facilities or retail locations. Understanding and managing inventory levels enables firms to optimise their supply chain, improve customer happiness, and strike a balance between satisfying market demand and lowering operating expenses.
Maintaining proper inventory levels is critical to good operational management. When your inventory is low, you need to add additional goods to match client demand. Otherwise, this will cause stock to run out, resulting in missed sales opportunities. Having too much inventory requires a significant capital expense. The longer these goods are in storage, the more money you will spend on storage. There is also the possibility that these things will become obsolete, resulting in decreased profit margins when they are ultimately sold.
Striking the correct balance is critical for good inventory management. Insufficient stock can reduce sales, but excess inventory can be expensive and impact profitability. A company can satisfy consumer demand effectively while minimising needless holding expenses by monitoring and changing inventory levels as needed. This strategic strategy entails matching available supply to market demand while minimising the financial risks associated with stockouts and overstock situations.
What is the Ideal Inventory Level?
Having an ideal inventory level in your organisation involves keeping the proper amount of merchandise. It’s about managing client demand while not running out of things or having too much on hand. This allows you to maximise earnings while keeping storage expenses minimal. Not too much, not too little, just the ideal amount for your business.
a. Minimum Inventory Level
The Minimum Inventory Level (MSL) serves as a safety net, preventing stockouts. Maintaining minimal stock levels involves stocking just enough goods required to complete all orders. If your inventory runs out, you have a safety stock of extra products placed aside to avoid stockouts. Each company must maintain a minimum inventory level to ensure a steady supply of raw materials for ongoing operations. If the level falls below this threshold, production could be slowed down resulting in supply shortages.
The minimal inventory level is calculated as follows:
Minimum inventory level = average usage x average lead time (reordering level)
The formula for calculating the reorder level is as follows:
Reorder Level = Rate of Maximum Consumption x Maximum Reordering Period.
b. Maximum Inventory Level.
Determining maximum stock levels involves estimating the greatest amount of items that can be stored to meet requests without incurring extra storage expenses. Exceeding this limit may result in overstock, perhaps causing storage space problems. Unlike the minimum inventory level, which must constantly be maintained to avoid production delays, the maximum inventory level should always be within the specified limit. Exceeding this limit can lead to overstocking, with raw materials lying stagnant for a longer length of time, resulting in higher storage costs, pilferage, disparities in stock numbers, and other irregularities.
The method for calculating the maximum inventory level is:
Maximum Inventory Level = Reorder Level + Reorder Quantity – (Minimum Usage x Minimum Purchase Time).
The reorder level used in this formula is determined by:
Reorder Quantity = Average Daily Consumption x Average Purchase Time
Key considerations to keep in mind while estimating the maximum inventory level are:
- Average Daily raw material consumption: The quantity of materials utilised daily.
- The average purchase time required to replace raw material reserves: It is the time taken to get a fresh supply.
- Availability of storage space: The physical capacity to store products
- Reordering quantity: The amount ordered to restock stockpiles
- Inventory costs: It is the expenses involved with retaining stock
- Potential challenges: Risks such as damage, pilferage, and supplies becoming out-of-date
- Pricing: Fluctuations in raw material prices
- Raw material shelf life: The amount of time that a material can remain unusable
- Consumer preferences shift over time
Things to Consider to Maintain an Optimal Inventory Level
Effective inventory management provides a competitive edge by assuring a consistent flow of goods and safeguarding your company from stockouts and missed transactions. To maintain appropriate inventory levels, consider the following:
- Just-in-time (JIT) Inventory Management:
JIT inventory management reduces excess inventory by coordinating production and restocking with real demand. It reduces carrying costs and the danger of old inventory. Although JIT is important, accurate forecasting and a dependable supply chain cannot be avoided to prevent stockouts.
- ABC Analysis:
ABC analysis divides inventory items into 3 categories: A, B, and C according to their relevance. Items under ‘A’ are classified as most important, ‘B’ moderately important, and ‘C’ low priority. This categorisation helps your company focus on stock management efforts and resources where they are most needed.
- Inventory Software and Technology:
Using modern inventory software and technology is essential in the digital world. These systems provide real-time insight and automation, enabling firms to make data-driven choices and accurately manage stock levels.
Digitisation to Manage Stock Levels
Businesses are starting to digitalise their work processes to improve their supply chain strategy and execution. Using a Warehouse Management System (WMS) instead of manual inventory management enables real-time stock monitoring.
Logistics managers can calculate suitable inventory levels by tracking all commodities’ entrances, exits, and movements. For example, recognising high-demand items ensures that they are always accessible, avoiding stockouts and delays.
The software uses product turnover analysis to automatically calculate optimal inventory levels. With this information, the programme efficiently manages procurement operations, guaranteeing that the company always has the necessary commodities to execute requests.
Managing a large number of products gets more difficult when inventory is scattered across many sites. Companies that use a multi-location inventory management approach can use cloud-based logistics software to coordinate stock management across locations. This enables operators to use the system from anywhere with an internet connection. The management approach also optimises responsibilities in each warehouse and manages stock transfers across centers.
Here’s how you can utilise digitalisation to improve inventory management:
Forecasting Demand:
Ideal inventory management requires balancing demand for supplies and accessibility. Digitisation enables more accurate forecasting by combining data from a variety of sources, including consumer requests, current market trends, past trends, and manufacturing strategies. This data is used by advanced analytics, AI, and machine learning to generate projections and insights that enable production schedule management and inventory adjustments.
Tracking Inventory:
Accurate tracking of quantity, quality, and location is essential for effective inventory management. Through the use of technologies like barcodes, GPS, and the Internet of Things, digitisation makes it possible to monitor several locations and supply chain stages in real-time. Software and cloud-based solutions also make it simpler to access and share inventory information.
Refill Inventory:
Through digitisation, restocking of inventory is possible. It can help generate automation according to established standards, which minimises human error and delays.
Analysing Inventory:
Optimal inventory level relies on analysing inventory performance. It can help you to discover possibilities for improvement. Digitisation enables the creation of dashboards,visualisation tools, etc offering insights and recommendations.
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Conclusion
With increasing consumer expectations and competition, developing a seamless supply chain process is crucial. For this, achieving excellent inventory management becomes a top priority. You can start by recognising the significance of inventory levels that extends beyond just numbers on financial records; they serve as a strategic tool to avoid stockouts, excess storage expenses, etc.
You can establish automation in your company by employing successful tactics such as AI technology. Digitisation is important for inventory management to maintain an ideal inventory level, monitor key performance metrics, become flexible to market changes, and encourage healthy partnerships with your suppliers.
The distinction between inventory and stock is subtle but crucial. Stock items are the products that you sell to clients. Inventory encompasses the things you sell and the materials and equipment required to manufacture them.
Here is the strategy to plan inventory levels:
– Demand estimation
– Make a replenishment plan
– Inventory tracking
– Monitoring and adjusting stock
Inventory Managers are specialists who oversee the company’s inventory levels. They lead a team that receives and records new merchandise as it arrives or ships out. They also analyse various suppliers, log daily deliveries, and review new shipments.
