Both insufficient and excess inventory are caused by negligence in ordering, operations, and storage, so they should be avoided in inventory management. To prevent this, it is generally necessary to set standard inventory levels and maintain them. These standards are the "minimum inventory level" and "maximum inventory level." To prevent stockouts, the minimum standard is the "minimum inventory level (safety stock)" . Conversely, to avoid excess inventory, the necessary standard is the "maximum inventory level (upper limit)" . It is necessary to monitor inventory status using these two standards.
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Use days as the unit for calculating inventory levels Controlling individual items with excessive quantities can prevent excess or insufficient inventory. There are two methods: one is to calculate using actual numbers, and the other is to calculate using days. These two methods can also be combined. To control individual inventory items, it is necessary to understand the method of calculating inventory in days. The indicators for this method are the inventory turnover rate and inventory turnover cycle. Dividing the outbound amount by the inventory amount gives the inventory turnover rate, expressed in times. The higher this rate, the faster inventory is reduced and converted into cash. The inventory turnover days in the inventory turnover cycle are calculated by dividing 365 days by the inventory turnover rate. This number of days represents the time from purchase to sale, so it indicates the inventory level. In short, to control inventory, it is easier to understand by using "how many days' worth of inventory," that is, expressing the current inventory level in days. Therefore, the minimum and maximum inventory levels are expressed in days, based on the standard of "how many days' worth of the average daily outbound quantity." 2
Calculating the minimum inventory level There are two methods to set the minimum inventory level: (1) Set within the order and delivery lead time. (2) Reflect the fluctuation range of average daily outbound quantity. Generally, the calculation of the minimum inventory level is based on the order and delivery lead time. The order and delivery lead time is the number of days from placing an order to delivery. If the lead time is seven days, then the basic minimum inventory level is six days' worth. To be safe, one day is subtracted here, so it is practical not to set the minimum inventory level too large, but within the range of the order and delivery lead time. Minimum inventory level (basic days) = Order and delivery lead time (days) - 1 day The order and delivery lead time varies by industry, so the lead time in the distribution industry is shorter than in manufacturing, and it is generally agreed upon with customers in advance. However, the average daily outbound quantity is not fixed. In cases of irregular distribution, it is necessary to calculate the minimum inventory level considering the fluctuation range. Minimum inventory level (days) = Minimum inventory level (basic days) + (Maximum daily outbound quantity - Average daily outbound quantity / Average daily outbound quantity) According to this method, the larger the maximum daily outbound quantity, that is, the greater the difference between the maximum and average daily outbound quantity, the more the minimum inventory level should be increased. Therefore, even if there is a sudden large order, it can be handled to a certain extent. This is a practical method for determining the minimum inventory level. 3
Calculating the maximum inventory level The formula for the maximum inventory level is twice the average inventory level minus the minimum inventory level, and the resulting value is related to the average and minimum inventory levels. The calculation of the minimum inventory level in days has been explained, and here we will discuss the calculation method for the average inventory level. The average inventory level can be calculated as the average of the beginning and ending inventory, or the average of the total for 12 months, and the resulting numbers will differ. In short, using different average inventory levels will result in different management levels. -END- The best learning platform for FMCG distributors in China Focusing on providing professional, practical, and applicable tutorials for enterprises and distributors Committed to helping Chinese FMCG distributors grow rapidly The most professional and practical knowledge base in the FMCG industry Reply with the red number below to get the corresponding content Reply with number 1 to view the complete knowledge base | 001 Excellent article selection | 002 Distributor market operations | 003 Terminal visit management | 004 Sales supervisor skills | 005 Sales improvement techniques | 006 Channel expansion | 007 Managing distributors | 008 Distributor development | 009 Distributor internal operations management | 010 Team management | 011 Efficient distribution techniques | 012 Sales manager's eighteen skills | 013 KA operation methods and strategies | 014 First lesson for new salespeople | 015 Internet, brands | 016 Distributor B2B transformation | [Long press QR code to follow]