The appropriate level of safety stock is typically determined by the min/max inventory formula. This formula takes into account the projected usage rate and the desired level of customer service.
In order to calculate your min/max inventory levels, you will need to know your:
1) Projected usage rate
2) Desired level of customer service
With this information, you can plug it into the min/max inventory formula to get your results.
1) Projected Usage Rate:
The projected usage rate is the average amount of inventory that you expect to sell over a period of time. This can be calculated by taking your current sales and dividing it by the number of days in your calculation period. For example, if you sold 10 Widgets last month and you want to calculate your min/max inventory for the next month, you would take 10 (current sales) and divide it by 30 (days in a month). This would give you a projected usage rate of .33 Widgets per day.
2) Desired Level of Customer Service:
The desired level of customer service is the percentage of orders that you want to fill without having to backorder any items. This number will be different for every business, but is typically between 95-98%.
Now that you have your projected usage rate and desired level of customer service, you can plug it into the min/max inventory formula.
Min/Max Inventory Formula:
Math and formulas incoming below!
But before we get to those, here are 2 things you need to know:
Lead Time in Days:
– This is the number of days it takes for you to receive an order from your supplier.
Safety Stock Percentage:
– This is the percentage of inventory that you want to keep on hand in order to avoid running out of stock. A common safety stock percentage is 10%.
Now that this has been covered, here’s how you calculate your Min/Max inventory 👇
Min/Max Inventory = [(Projected Usage Rate x Lead Time in Days) / Desired Level of Customer Service] – Safety Stock Percentage
Here’s an example; let’s say that you have a projected usage rate of 10 units per day, a lead time of 5 days, and a desired level of customer service of 95%. Plugging this into the min/max inventory formula, we get:
[(10 units per day x 5 days) / 95%] – 10% = 52.63 units
This means that you would want to keep 52.63 units of inventory on hand at all times in order to meet your customer’s demands.
Conclusion
Remember, the min/max inventory formula is just a guide. You may need to adjust your safety stock percentage depending on the volatility of your product demand. For example, if your product demand is very volatile, you may want to keep a higher safety stock percentage in order to avoid running out of stock.
If you have any questions about how to calculate your min/max inventory levels, feel free to reach out to us and we’d be happy to help!
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