Inventory Optimisation
Max & Re-Order Points
Maintaining dynamic maximum and minimum reorder points for inventory involves regularly monitoring and adjusting the levels at which new inventory should be ordered to ensure that there is enough stock on hand to meet customer demand without overstocking.
This can be done through various methods such as using statistical forecasting models, monitoring sales trends, and analyzing inventory turnover.
It is important to regularly review and update these reorder points to ensure they are accurate and responsive to changes in demand.
Safety Stock
Safety stock is an inventory management technique used to ensure that a sufficient amount of stock is available to meet customer demand, even if there are unexpected fluctuations or delays in the supply chain. Safety stock helps to reduce stock outs, which can lead to lost sales and unhappy customers, and also helps to reduce customer waiting times.
Safety stock is usually calculated by taking into account the lead time for replenishing inventory, the variability in demand, and the desired service level. The lead time is the amount of time it takes to receive new inventory after placing an order. The variability in demand refers to how much the demand for a product can fluctuate. The desired service level is the probability that there will be enough stock on hand to meet customer demand.
The safety stock is calculated by multiplying the standard deviation of demand during lead time by the desired service level factor. The resulting number is added to the maximum expected demand during lead time. It’s important to monitor and adjust the safety stock level regularly to ensure it is still adequate.
It’s also important to note that while safety stock can help reduce stock outs, it also increases holding costs, and it’s important to balance these costs with the benefits of reducing stock outs.
EOQ economic order quantity
Economic Order Quantity (EOQ) is a model used to determine the optimal quantity of a product to order at one time in order to minimize the total costs of inventory. The EOQ model considers two types of costs: holding costs and purchasing costs.
Holding costs refer to the costs associated with storing and maintaining inventory, such as warehousing, insurance, and obsolescence.
Purchasing costs refer to the costs associated with placing and receiving orders, such as administrative expenses and transportation costs.
The EOQ model helps to balance these two types of costs by determining the optimal order quantity that minimizes the sum of holding costs and purchasing costs.
Service Level Analyse
Inventory service level analysis is a method used to measure the effectiveness of a company’s inventory management systems. It is used to determine the level of customer service that a company is able to provide by analyzing factors such as inventory turnover, fill rate, and stock-out rate.
The goal of this analysis is to identify areas for improvement in order to increase efficiency and customer satisfaction. This can be done by analyzing data such as sales, inventory levels, and customer demand to determine the optimal inventory levels and reorder points. Additionally, some of the key metrics used in inventory service level analysis include:
- Service level (the percentage of customer demand that can be met from inventory on hand)
- Stockout rate (the percentage of demand that cannot be met due to stockouts)
- Lead time (the time it takes for an order to be received after it is placed)
- Fill rate (the percentage of orders that are shipped complete and on time)
- Carrying cost (the cost of holding inventory, including storage, insurance, and interest expense).
Leadtime
Lead time is a crucial aspect of inventory management, as it can have a significant impact on a business’s ability to meet customer demand and manage its inventory levels effectively.
If lead times are not accurately calculated, it can lead to stockouts, overstocking, and increased costs. To avoid these problems, businesses need to accurately determine lead times for their products and factor them into their inventory management processes.
This includes forecasting demand, setting reorder points, and monitoring inventory levels closely to ensure that stock is always available to meet customer demand. Additionally, businesses should also establish good communication and relationships with suppliers to ensure that lead times are accurate and consistent.
With the proper forecasting, lead times can be used to help businesses make better, more informed decisions about their inventory levels.
Forecasting
Inventory forecasting is the process of predicting future demand for a product or group of products. This information is used to plan inventory levels, production schedules, and purchasing activities. There are several methods that can be used for inventory forecasting, including:
- Qualitative methods, which involve using expert judgment, such as surveys and market research.
- Time series analysis, which involves analyzing historical data to identify patterns and trends in demand.
- Causal methods, which involve identifying factors that cause changes in demand and using them to predict future demand.
- Statistical methods, such as moving averages, exponential smoothing, and trend analysis.
Once the forecast is complete, demand planning can begin. It is the process of reviewing the inventory forecast and determining how much of each item should be ordered to meet that forecasted demand.
This includes determining the optimal order quantity, the ideal reorder point, and the appropriate safety stock. The goal of demand planning is to ensure that products are available to meet customer demand while minimizing inventory costs.
In practice, businesses often use a combination of methods to create an accurate forecast. It’s also important to monitor and adjust the forecast as necessary, as demand can change due to external factors such as seasonality, economic conditions, and competitors’ actions.
