If you have a company of your own, you need to set a minimum stock through some calculation of stock that your company always must have. It is an absolute safeguard in point-of-stock contingencies. It is good to know that when a company is in the condition of out of stock once, the condition of the company proves a massive pitfall as it would result in the loss of customers.
Please be on the page and please do not go away as today, this article will provide you with the information to keep the minimum stock level, how to calculate the stock, its advantage, and many other things.
Definition of Minimum Stock
It is good to know that the minimum stock becomes the lowest quantity of product that the company needs to keep its hand at any moment to avoid stockouts or backorders. The actual product or material stock from the company’s side must not come at the below the pre-determined point. On the other way, you can say that the minimum quantity of stock amount of the company must be in the company’s store.
Maintaining the minimum stock is surely highly critical as it goes directly with responsibility for the company just to meet the demand in the market and even to keep production active all the time. Suppose you are a manufacturer and once your raw material stock comes down under the minimum level, then the everyday process of manufacturing must be hampered and even stopped. In that condition, you should have to give serious attention to the right calculation and maintain minimum stock levels for the right operations flawlessly.
How to calculate the minimum stock level?
Before you come to face the minimum stock at your company or business concern, you need to be more cautious. For the right calculation, you can apply various methods to maintain the stock. To have the right conception for maintaining the stock, you need to go through the details below.
Three things are mainly necessary to keep the minimum stock and those are
- Average Demand Method
- Reorder Point Method
- Safety Stock Method
The three methods will have certain different factors and depending on the factors, every stock formula is completely different from others. Now you can understand the easy way to maintain the minimum stock.
Average Demand Method:
The method that you must know is the procedure of calculation for minimum stock level and in this regard, you also will know some steps which are called (1) Average daily demand for a product and Average selling time of the product.
Formula for Minimum Stock
Average Daily Demand X Average Time to Sell.
With a simple example, you can understand. Suppose you have a small retail clothing store and there, on average, you can sell 30 T-shirts in 2 days but in the market, the demand goes for 50 T-shirts per day. So the calculation is like that:
Stock Level at Minimum: Average Daily Demand X Average Time for Sell = 50X2= 100
Safety Stock Method:
The factors in consideration in this particular method for calculation are :
- Average demand in a regular way
- Expected demand fluctuation rate or Standard deviation demand
- Average lead time or the shipment time that takes to arrive from the supplier to you.
- The expected safety level is the amount of extra stock that you want to have just to manage demand fluctuation.
Formula
Minimum Stock Level = Average Daily Demand X Standard Deviation Demand X Average Lead Time X Desired Safety Level
Example: in that case, you can go retail T-shirt business that is going to grow and you will have an average regular demand of 10 T-shirts, and the standard deviation is five T-shirts for one day which is the average lead time. Here the desired safety level is also 5. So, here the minimum stock level must be calculated as:
How can you calculate the Minimum Stock? = Average Daily Demand X Standard deviation
(i) Demand X Average Lead Time X Desired Safety Level
That means in calculation = 10 X 5 X 1 X 5 = 250
Recorder Point Method:
The factors that you should consider in that case are
- Average product demand per day/week/month
- Number of days for receiving a new shipment
Formula :
Minimum Stock = Average Demand Per Day x Receive a New Shipment in Number of Days
Example: If you come to sell 20 T-shirts on an everyday basis and it takes 3 days to accept new shipments the calculation will be like this:
How can you calculate in a different way?
That means the stock level for minimum = 20 x 3 = 60
Factors Affecting Minimum Stock
In this particular section, you need to understand all the factors that are the minimum inventory details of your business. The key factors that affect the minimum stocks are product rate and market demand.
If the market demand regarding a product is certainly at a decreasing level and even the rate has also lowered, you may see a loss on the products stored already. The reason is that you have purchased those products from the supplier at a high rate.
The best process is to cope with and it is to be purely up-to-date according to the market scenario even if you need to calculate the low level of inventory frequently especially before an off-season because, in those times of the year, the demands remain low generally.
Limitations of minimum stock or maximum
In a company where the minimum stock is the lower limit and below which the actual stock from a company must not fall and even the maximum stock comes higher above it is considered as overstocking for a company.
The function according to SKU ( Stock Keeping Unit Codes) goes to help in keeping track of the stocks. Undoubtedly, these two rules are effective in controlling the stock of a company or inventory unit. Despite that, there are certain limitations. They are :
- In in-kind trading business, the policies regarding policies defer from supplier to supplier and even some may need the buyer company to reach a particular selling point just to reorder the goods. This particular level comes under the division of all kinds of goods in which the suppliers deal. However, the maximum or minimum stock is for the functions based on individual SKUs and even not according to the supplier’s order policy.
- During SKU life cycles like introduction, maturity, growth, and decline, the maximum or minimum stock level must be checked continuously. If it is done without checking, there will be a risk of overstocking or dead stock.
Advantages of Minimum Stock Management
The minimum stock comes to work as a great tool for companies just to maintain inventory effectively and to cope with loss because of stockouts.
If you come to store products with less than the minimum stock you will run out of stock with a great loss in sales. On the other side, unnecessary overstocks in the warehouse bring risks of converting goods into dead stocks. As you have been already engaged with your money in your business, this is also the reason for losses.
Moreover, the amount of the product that you store in the warehouse is directly related to the production necessity, market demand, cost, and other related factors of the supply chain. The maximum or minimum stock level regarding inventory helps to mitigate these concerns and smoothly run the supply chain.
The process of inventory to maintain minimum stock:
The most meaningful steps such as inventory optimization come to create a huge difference in the growth of the business. Optimization of inventory means the right number of products in stock that contributes to maintaining of minimum stock. Effective inventory optimization comes in the checking process depending upon the several factors that will be discussed below.
Demand on forecasting
Demand forecasting becomes a system that helps to predicate the number of sales with revenue for a future period. This is a predictive analysis method designed with previous sales of a company.
With a good knowledge of the minimum stock level after calculation, we will have to come to an understanding that previous sales records play a great role here. You will know the market demand for the products that you come to sell based on previous sales experience.
By doing a lot, you can get an idea of how much you have come to stock for the future period and the chances of running out of stock are at lower.
Inventory Replenishment
This is a process of transportation of goods from the manufacturer or the supplier to the retailer or from the inventory storage to the picking shelves. This system comes with a process of transportation of goods from the supplier or the manufacturer to the retailer or even from the inventory storage at the picking shelves.
Inventory replenishment at the right time makes sure that enough product gets ready on your picking shelves and even when orders are received once, you can quickly pack and release the items for delivery. The growth of a business or company depends mainly on your steps regarding getting the right type of product to your customers. Moreover, timely inventory replenishment does not allow you to go out of stock, and improvement of new customer satisfaction and interest in your concern.
Inventory Levels
With an idea of your inventory level, you can greatly manage stock in your company. If you have a smaller number of products in your stock, you surely will lose sales with customers for not meeting their needs in the accurate time.
On the other side, with an excessive stock of items, you can engage more capital than the actual need. The inventory levels after optimizing, help you to know the actual needed stock amount which must be in storage, smooth business functions, customer loyalty, and improved cash flow.
Storage in inventory level
The important factor that must be prioritized for optimizing the inventory storage. Your storage capacity will reach the highest and at the same time, it will be cost-effective.
You need to manage your inventory in such a way that with the stock in your hand, you can easily meet the market demand and even you will have the capacity to store new products in urgent demands. As a result, storage management must be smooth, error-free, and efficient.
Minimum Stock Level Setting
It is challenging for you to calculate and keep track of the minimum stock level. It needs real-time inventory analysis, accurate calculations, and sales history, and without doing these, challenges may crop up.
- Incorrect or inaccurate demand forecasting can bring a challenge to maintaining optimum stock levels. Both overestimating and underestimating can come to pose a challenge.
- The suppliers can fluctuate regarding their lead times and as a result of that, it becomes difficult for the business to keep a knowledge of how much buffer inventory they need to maintain. Suppose, the lead time is longer, the businesses easily can keep higher minimum stock levels to prevent stockouts.
- The cost of carrying inventory and handling costs also affect profitability.
- The availability of some products depends on the season and for such products, business needs to maintain minimum stock often.
- Monitoring minimum stock sometimes becomes time-consuming and complicated for businesses if you do not come to use automated software.
Inventory Levels with ERP
Minimum Stock Level creates the right balance between inventory and demand and even ensures low cost. With deep analysis and the right supervision by ERP Solutions, the process of this challenge can be handled.
Cloud-based ERP with inventory solution makes you right to monitor the inventory and come to manage maximum with minimum stock with ease. It comes with offers in-depth visibility of your inventory simplifying inventory management and recordering systems. Tracking records of purchases and sales can be done with smart dashboards just to give you a complete overview of your right business functions and help you to make decisions at the right time.
FAQ
Is Smart Stock necessary for business?
Undoubtedly, safety stock is necessary to maintain consistency in the supply chain and it allows you to stock available at any time.
What are the benefits of minimum stock?
The minimum stock helps you to indicate the reorder points and as a result, you never run out of stock.
What are the types of stock levels?
For the business, there are two types of minimum stock levels named (a) Recorder Point (ROP) and Safety Stock.
Conclusion
Take responsibility regarding minimum stock from the beginning for your business and keep the business going active and profitable.
