Keeping the right stock at all times is a bit challenging act, yet fruitful and ensures your business is always in good health. Too much stock, you end up with dead stock, increasing overhead costs. Too little stock and you fail to meet your customers’ demands, leading to customer dissatisfaction.
Fortunately, technology comes to our rescue. Tools like mobile apps, AI-based analytics, and real-time tracking are making it easier than ever to make smart inventory choices.
In this blog, we will cover the basics of managing stock levels, talk about different inventory types, walk through some handy formulas to help calculate minimum and maximum stock levels, and share some best practices along the way. Plus, we’ll introduce a good mobile inventory management solution that can help stay on top of your stock control game.
Overview:
What are Inventory Levels?
Before we move deeper into stock management and talk about best practices, let’s understand the basics of inventory level and its various types.
Inventory levels refer to the amount of stock a business holds at any given time. They indicate whether the current stock is sufficient to meet demand and help predict when to reorder. Well-maintained inventory levels prevent stockouts, reduce overstocking, and ensure smooth operations by keeping supply in line with demand.
For instance, an apparel retailer that accurately maintains its inventory levels can avoid missing out on high-demand items during peak seasons while minimizing dead stock on unpopular items.
Did you Know?
On average, inventory carrying costs represent 20%–30% of total inventory costs. This includes expenses like storage, handling, and opportunity costs. Source: Investopedia.
For example, a business with $1 million in inventory can expect carrying costs to range from $200,000 to $300,000 annually. Lowering these costs by optimizing storage and handling processes can significantly boost profitability
Types of Inventory Levels
Managing inventory levels involves understanding the types commonly tracked in businesses. Here are a few key categories:
- Minimum Inventory Level: This is the minimum quantity of stock you need to maintain to avoid a stockout. It acts as a safety threshold.
- Maximum Inventory Level: This is the upper limit of stock to avoid overstocking, which can lead to increased holding costs. If there is a huge demand for certain items on a particular season, it’s prudent to maintain maximum inventory levels only for that season to avoid failure to meet customers’ demands.
- Reorder Level: This level triggers a new order and is set above the minimum level to ensure that stock doesn’t dip into critical shortage.
- Safety Stock: Often an extra buffer added on top of the minimum level, safety stock is maintained to handle unexpected spikes in demand or supply chain delays.
Understanding these levels allows you to set accurate benchmarks, ensuring inventory always aligns with your customers’ needs without excessive surplus.
How to Calculate Minimum and Maximum Inventory Levels?
Calculating inventory levels accurately is essential for efficient stock management. Here’s a quick overview of how to calculate minimum and maximum inventory levels.
Minimum Inventory Level
To calculate the minimum inventory level, multiply your daily sales rate by the lead time (the time it takes to replenish stock).
Formula:
Minimum Inventory Level = Daily Usage Rate × Lead Time
For example, if your company sells 50 units of a product daily, and it takes 10 days to receive a new shipment, the minimum inventory level should be 500 units.
Maximum Inventory Level
The maximum inventory level depends on the reorder quantity, safety stock, and minimum stock levels.
Formula:
Maximum Inventory Level = Reorder Quantity + Safety Stock – Minimum Level
If the reorder quantity is 700 units, safety stock is 100, and the minimum level is 500, then the maximum level should be 300 units.
Knowing these formulas enables you to anticipate stock needs, preventing the risk of over- or under-stocking.
Benefits of Maintaining Optimum Inventory Levels
Maintaining the right inventory levels has significant advantages for your business. Some of the key benefits include cost efficiency, customer satisfaction, minimized waste and shrinkage, and improved cashflow. Let’s briefly decode these benefits:
Cost Efficiency
Storing excess inventory increases carrying costs, including warehousing, labor, and insurance. Studies show that these carrying costs can constitute 20-30% of the total inventory cost annually. By keeping optimal levels, you reduce these costs.
Customer Satisfaction
Customers expect timely delivery and product availability. Running out of stock can lead to disappointed customers, with 63% of shoppers citing stockouts as a primary reason for switching brands.
Minimized Waste and Shrinkage
Excess inventory can lead to spoilage or obsolescence, particularly in industries dealing with perishable items. For example, unsold fashion items at the end of a season often have to be heavily discounted or written off.
Improved Cash Flow
Efficient inventory management allows you to free up capital that would otherwise be tied in stock, giving you flexibility for other operational investments.
Tips to Maintain Optimal Inventory Levels
While the benefits you gain by implementing optimal levels of inventory are immense, it is time to revisit and transform your existing inventory management practices.
The goal is not to have the right inventory; it’s to have the right amount of the right inventory at the right time.”
True to this quote, to successfully accomplish the goal of optimum inventory levels, let’s follow certain tips or best practices to make your business stand-out.
Here are some actionable tips:
1. Analyze Data Regularly
Consistently use data analytics to monitor trends, seasonality, and customer behavior. By analyzing sales patterns and demand fluctuations, you can make more accurate forecasts and informed decisions.
For example, a sports retailer might strategically stock up on specific equipment and apparel just before peak sports seasons to maximize sales and meet demand. Regular analysis also allows for the identification of emerging trends, helping your business adjust its inventory and marketing strategies proactively.
2. Automate Reordering
Implementing automated reordering systems minimizes human error, ensuring more accurate and consistent stock levels. By setting reorder points that account for lead times and safety stock, your business can proactively manage inventory, helping to prevent costly stockouts while maintaining optimal stock availability.
Automation also reduces the amount of manual work involved in monitoring inventory levels, allowing your staff to focus on more strategic tasks rather than routine reordering processes. The result is optimized efficiency across the supply chain, better resource allocation, and a more streamlined approach to meeting customer demands on time.
3. Conduct Regular Audits
Conducting regular inventory audits is essential for verifying that actual stock levels match recorded data, ensuring accuracy in inventory management. These audits help identify issues such as shrinkage, theft, misplacement, or discrepancies in stock counts, enabling corrective actions to be taken promptly.
Regular checks provide valuable insights into potential problem areas, helping to spot trends in losses or discrepancies that might indicate larger issues within the supply chain or storage process.
Maintaining accurate inventory data through frequent audits not only improves financial reporting and forecasting but also boosts overall operational efficiency, minimizes losses, and enhances decision-making related to restocking, procurement, and resource allocation.
4. Monitor Supplier Reliability
A reliable supplier will always ensure you get the right stock at the right time under any circumstances.
If you want to maintain a smooth and efficient supply chain, forging a strong partnership with reliable suppliers is paramount. Such suppliers will help minimize unexpected delays that can disrupt inventory levels and order fulfillment.
By consistently monitoring supplier performance and understanding their lead times, you can anticipate any potential delays and plan buffer stock accordingly to ensure that customer demands are met.
Regularly assessing supplier reliability allows for proactive decision-making, such as adjusting order quantities, sourcing from alternative suppliers if needed, or implementing contingency plans to mitigate the impact of supply disruptions.
Maintaining strong relationships with dependable suppliers also fosters trust and flexibility. This can be invaluable during peak demand periods or unforeseen supply chain challenges, ultimately leading to improved service levels and customer satisfaction.
5. Implement Just-in-Time (JIT) Inventory
Adopting a Just-in-Time (JIT) inventory approach involves ordering and receiving goods only when they are immediately needed for production or sales. This helps reduce excess stock and the costs associated with holding inventory. This strategy minimizes waste, improves cash flow, and reduces storage requirements, as products aren’t held for extended periods.
If your business has a predictable demand pattern, then JIT perfectly works for you. A typical example is automotive or electronics manufacturing, where specific components are sourced and used directly in the assembly process.
By aligning inventory orders with actual production schedules, JIT allows your business to respond quickly to changes in demand while avoiding overstock and the risk of obsolete inventory. Implementing JIT requires a high level of coordination with suppliers and reliable delivery timelines, as any delays can impact the production process.
However, when executed effectively, JIT leads to leaner operations, greater efficiency, and a more agile response to market needs.
6. Use Safety Stock Wisely
Effectively managing safety stock is crucial for balancing inventory levels and meeting customer demands without incurring unnecessary costs.
Safety stock should be calculated carefully, considering both demand variability and lead time. This way, you can ensure adequate coverage for fluctuations in demand and unexpected supply delays.
Overestimating safety stock can lead to excessive inventory holding costs, increased risk of obsolescence, and tied-up capital, all of which can impact your business’s profitability.
Conversely, underestimating safety stock can result in stockouts, leading to missed sales opportunities, diminished customer satisfaction, and potentially damaged brand reputation.
By analyzing historical sales data, forecasting demand patterns, and regularly reviewing lead times, your business can make more accurate safety stock calculations. This way, you balance the risks and costs associated with inventory management. This approach allows your company to maintain service levels while optimizing inventory investment, supporting efficient operations and enhancing customer trust.
Role of a Mobile Inventory Solution in Maintaining Optimum Levels
While manual methods are often tedious, inefficient, time consuming and prone to errors, resorting to an automated solution, specifically a mobile friendly inventory application can be a game-changer. While investment is low, this solution plays a vital role in optimizing stock levels by providing real-time data access, streamlined workflows, and enhanced accuracy.
Using this solution, your managers and staff can track inventory movements, update stock levels, and monitor sales and demand from anywhere, ensuring that inventory data is always current. This real-time insight allows your business to maintain optimal stock levels, reducing the risk of overstocking or stockouts.
Additionally, a good mobile inventory management solution can often integrate forecasting tools that helps in predicting demand and adjusting inventory levels accordingly. This leads to reduced costs, improved efficiency, and better customer satisfaction.
Explore Propel Apps’ Mobile Inventory Management Solution
The previous section covered the key benefits of deploying a robust mobile inventory solution for effective inventory optimization. While there are many reputable providers offering various types of mobile inventory management solutions, it’s essential to choose one that is affordable, user-friendly, and tailored to meet your specific business needs.
In this context, explore Propel Apps’ mobile inventory management solution that streamlines your complex supply chain processes for Oracle EBS, Oracle SCM Cloud, and SAP S/4 HANA while efficiently capturing and maintaining your barcode inventory data. Simply stated, this solution offers a streamlined approach to inventory control, enhancing the way you monitor, track, and replenish stock.
Let’s track some of the key features of this solution:
a) Real-Time Tracking
The solution provides real-time visibility into inventory levels, enabling you to make informed restocking decisions instantly.
b) Automated Reorder Notifications
This solution allows you to set reorder levels and receive alerts whenever stock levels reach a critical threshold. This feature reduces the risk of stockouts, helping you keep pace with demand.
c) Data-Driven Insights
Access to historical data and analytics helps you forecast demand more accurately, optimizing stock levels for different products.
d) User-Friendly Mobile Interface
The mobile-friendly platform allows for inventory management on-the-go, giving flexibility to track and update stock data anytime, anywhere.
e) Offline Capability
This is one of the major features of this solution, offering capability to process your ERP transactions even when your internet connectivity is poor, or your ERP (SAP/Oracle) servers are down. This way, you never lose productivity – whether you are online or offline.
To know more about this solution and how it can help in maintaining optimal inventory levels for your business, schedule a free demo with us.
Final Words
Managing inventory levels is both an art and a science. It requires a strategic approach to avoid common pitfalls, such as stockouts and overstocking, while keeping costs low. By calculating minimum and maximum levels accurately, implementing best practices, and leveraging technology, you can streamline inventory management to support your business’s growth and efficiency.
Optimal inventory management isn’t just about stock—it’s about building a resilient and responsive business ready to meet customer demands and adapt to market changes. Embrace these strategies to take control of your inventory, reduce costs, and boost customer satisfaction.
