Thursday, August 21, 2008

How much to stock?

How do you know if you have too much, too little, or just the right amount of stock inventory? One way is to compare the value of your current inventory to an "ideal inventory investment." In this article we will discuss how to calculate the value of this "right" amount of inventory. As with many of our other inventory analysis tools, calculating the ideal inventory investment requires that we first separate those inventory items with recurring demand from those items with sporadic usage.

Recurring Usage Items
Recurring usage products are sold or used on a regular basis. Typically these items:
* Have had usage in at least eight of the last twelve months.
* Have had usage in at least four continuous months in the last twelve months (this second condition identifies seasonal items that are only sold during certain times of the year).

Replenishment of these items is normally based on safety stock quantities, order points, line points, and standard order quantities:
* Safety Stock Quantity: The "insurance" inventory maintained in stock to protect you from stock outs resulting from unexpected customer demand or vendor shipment delays.
* Order Point: The Safety Stock Quantity plus predicted demand during the anticipated lead time.
* Line Point: The Order Point plus predicted demand during the supplier review or order cycle; the normal length of time between typical replenishment orders with the supplier.

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