Companies face various challenges when managing their inventory, but there is one universal need that they all share: the constant quest to maintain optimal stock levels. In the following lines, we will explore this vital concept in inventory management, analyse in detail how to achieve and maintain optimal stock levels, examine how they are calculated, and look at practical examples, examining both the common aspects and the particularities of these sectors.
First, it’s important to define some fundamental concepts, such as stock level and inventory optimisation. Understanding these terms will provide the basis for exploring how to maintain the ideal stock level.
What is stock level?
Stock level refers to the amount of inventory a company has at any given time. It’s a crucial metric for businesses to track, as it helps ensure they can meet customer demand without overstocking.
What is optimal stock?
Optimal stock in a warehouse refers to the level of inventory considered ideal for meeting product demand efficiently, minimising costs associated with storage and inventory management. This stock level is determined by balancing several factors, including anticipated product demand, supplier lead times, storage costs, ordering costs and the need to avoid stock shortages.
The goal of optimal stock is to ensure that a company has enough products in its warehouse to meet customer demand without incurring unnecessary costs related to excess inventory. Maintaining optimal stock helps maximises operational efficiency and ensures products are available when customers need them, thereby improving customer satisfaction and profitability.
What is the relationship between optimal stock and inventory optimisation?
Optimal stock and inventory optimisation are closely related, as both concepts focus on ensuring that a company has the right amount of products in its warehouse to meet demand efficiently and profitably.
Stock optimisation is a process that aims to achieve maximum availability of our inventory with minimum investment in stock. In other words, it is about being able to have just the right inventory to offer the desired level of service at all times for all our references.
Here is an explanation of how they are related:
Common goal
Both optimal stock and inventory optimisation have the primary goal of minimising total inventory costs while ensuring that products are available when customers need them. Inventory optimisation seeks to find the right balance between investment in inventory and customer satisfaction, and optimal stock is part of that process.
Determining stock levels
Inventory optimisation involves determining the optimal stock level for each product based on factors such as historical demand, lead times, storage costs and ordering costs. This optimal stock level is what is known as “optimal stock.” Therefore, inventory optimisation is the process by which optimal stock is calculated and sought to be maintained.
Continuous monitoring and adjustment
Both optimal stock and inventory optimisation require constant monitoring and adjustments as necessary. Demand and other factors can change over time, so it is important to adapt the stock level to keep it in line with inventory optimisation objectives.
Improved efficiency
Inventory optimisation, including determining and maintaining optimal stock levels, seeks to improve a company’s operational efficiency. This involves reducing unnecessary storage costs, minimising ordering costs and avoiding stock shortages or excesses.
Customer satisfaction
By ensuring that products are available when customers need them, both optimal stock levels and inventory optimisation contribute to improved customer satisfaction. Customers are more satisfied when they can obtain the products they want in a timely manner, without delays or stockouts.
In this regard, we can ask ourselves the following question…
Who needs to optimise their inventory?
Any company that works with stock references and independent demand, i.e., that does not know what reference or quantity will be requested at any given time, needs to optimise its inventory. Otherwise, sub-optimal inventory causes serious operational and financial difficulties. Shortages lead to lost sales and even lost customers, while stock ties up our capital. Furthermore, excess stock leads to obsolescence, which destroys the company’s profitability. If we add the current economic situation to these factors, optimisation becomes more than important, it becomes essential.
However, companies usually manage their inventories by taking into account the demand forecasts generated by their ERP systems and/or their sales teams. Unfortunately, this way of working does not have the appropriate forecasting and safety stock calculation models that would allow them to manage the behaviour of each of their references. The result: countless hours of work that ultimately yield poor results.
How to calculate optimal stock?
Calculating optimal stock, also known as the reorder point, involves considering several key factors to determine the amount of inventory that should be kept in the warehouse.
Optimal stock level formula
Here is a basic formula for calculating optimal stock:
Optimal Stock = (Average daily demand × Lead time in days) + Safety stock
Let’s look at what each of these components means:
Average daily demand
This value represents the average number of units sold or used per day. To calculate it, you can take the total demand over a period of time (e.g., one month) and divide it by the number of days in that period. This will give you an estimate of how much is needed on a typical day.
Lead time in days
This is the time that elapses from when an order is placed until the goods are received at the warehouse. It can vary depending on the supplier and logistics. You must take into account the time it takes to obtain new products once an order has been placed.
Safety stock
Safety stock is an additional amount of inventory that is kept to cope with variability in demand and delivery times. It is a precaution to avoid stockouts. The level of safety stock can be determined based on historical demand variability and variability in delivery times. The greater the uncertainty, the greater the safety stock should be.
Once you have calculated these three components, simply add the Average Daily Demand multiplied by the Lead Time in Days and the Safety Stock. The result will give you the amount of inventory you need to have on hand to ensure that you do not run out of products before a new order arrives and to cope with possible variations in demand or delivery times.
It is important to remember that this calculation is a simplification, and that inventory management can become more complex in real business environments due to other factors, such as costs associated with storage, replenishment strategies, and seasonality of demand. In addition, it is essential to regularly review and adjust the optimal stock calculation as business conditions and demand trends change.
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