The cost of inventory is so much more than what you pay for an item. You also have to store that inventory in a warehouse and have the associated costs of utilities, rent, payroll, insurance, and the list goes on. The cash savings that come from optimizing and reducing inventory levels can have a real effect on your bottom line. But what about new or sporadic items that lack data? How do you plan to have enough for customers, but not overload your inventory?
The Min/Max method is the simplest form of inventory control. Your minimum is the quantity of product on hand when it’s time to place an order and your maximum is the most you want on hand at any given time. It’s very easy to use but can lead to shortages or overstocks if not carefully monitored.
When do I use Min/Max?
Min/Max can have several use cases for your organization. When you’re not interested in using forecasting or just don’t have the time and resources to go through the calculations, have a short supply chain, can get things fairly quickly, or are introducing a new product, then using Min/Max makes sense.
The Min/Max method attempts to hold the inventory within a certain range. It’s ideal to use when formulas just won’t work due to a lack of data.
It is a good fit when a new item is introduced since there is no data to show how many months or how many units will sell. In this case, your best bet is to give it 6-12 months to gather data and use a min/max until you can nail down the selling patterns.
Min/Max is also ideal for distributors with a short supply chain that don’t have a lot of extra time for in-depth forecasting. It provides a quick way to keep an item in stock without heavy mathematics. As more data is gathered, the Min and Max should be adjusted.
For sporadic items, demand planners will need to know the frequency and lead time for the item and set their Min and Max levels based on their target stock quantity, provided their computer system does not have a robust sporadic items feature.
When I get to X, order enough to get back to Y
The min/max method tracks the current stock level, or the amount on hand plus the amount on order for every item. When your inventory reaches the minimum value, a trigger alerts you to reorder.
Calculating your reorder quantity will be easy. It’s the difference between the quantity you have and the Max values.
Max – Qty On Hand ÷ Available = reorder
Let’s imagine you have a new item with a target stock quantity of 19.6.
Set your min to 18 and your max to 24. That means, each time your inventory reaches 18, you’ll order 6 more. This keeps your supply chain around the 19.6 mark.
Determine your Min/Max
To easily determine your Min/Max levels for a regular (not sporadic) usage item, use the following formula:
Minimum Desired Days of Stock x Unit Sales per day = Min (in units)
Maximum Desired Days of Stock x Unit Sales per day = Max (in units)
Let’s put it into practice:
You sell 50 units per day and want to keep 60 days worth of product in inventory
60 x 50 = 3000 = Min
90 x 50 = 4500 = Max
One final note, we do not recommend rounding Min/Max values up to the vendor package quantity. This can lead to a “double rounding” effect when purchase orders are created, causing you to overstock the item.
Are you drowning in inventory management and need a lifeline? Atlas Precision Consulting offers forecasting services as well as full P21 management. We will work with you to make sure you’re using the right forecasting tools for your business and managing your inventory using the most efficient processes.