Minimum stock level

From CEOpedia | Management online

Minimum stock level is a management concept used to determine the minimum amount of inventory that should be maintained for a product. It is calculated by taking into account the rate of usage of the product, the lead time for procurement, the safety stock, and the desired level of customer service. The primary objective of having a minimum stock level is to ensure that the inventory of a product is not depleted to the point where it affects customer service. The level is constantly monitored and adjusted periodically in order to maintain the optimum amount of stock.

Example of minimum stock level

  • A grocery store may have a minimum stock level of 10 cans of corn for each store. This ensures that there is always a supply of corn available for customers, while also helping to control costs by avoiding having too much excess inventory on hand.
  • A car dealership may have a minimum stock level of five vehicles of a particular make and model. This ensures that customers can still find the model they are looking for, while also reducing the risk of having too much expensive inventory.
  • An electronics store may have a minimum stock level of 20 MP3 players. This ensures that there is always an adequate supply of MP3 players available, while also preventing the store from having too much excess inventory that could become obsolete.
  • A restaurant may have a minimum stock level of 10 portions of a particular dish. This ensures that customers can still order the dish, while also preventing the restaurant from having too much excess food that could spoil.

Formula of minimum stock level

The minimum stock level is calculated by the following formula:

$$\begin{equation}MSL=\frac{(U\times L)+ SS}{D}\end{equation}$$

The average usage rate per day (U) is the average number of units of the product that is used in a day. This is calculated by taking the total number of units used in a period (e.g. a month) and dividing it by the total number of days in that period.

The lead time (L) is the time it takes for the product to be delivered from the supplier. This should be taken into account when calculating the minimum stock level, as it determines how much stock should be kept in reserve to cover the time it takes to receive a new order.

Safety stock (SS) is the extra stock that is kept on hand to cover unexpected events such as an increase in demand or a delay in delivery. It is a buffer that is used to protect against stockouts.

The desired service level (D) is the acceptable level of customer service that is desired. It is expressed as a decimal, with 1.0 representing perfect service, and 0.0 representing no service at all.

By combining all of these factors, the minimum stock level can be calculated. This ensures that an adequate amount of stock is kept on hand to meet customer demand without overstocking.

When to use minimum stock level

Minimum stock level is an important tool used by businesses to ensure that they maintain the right amount of inventory at all times. It is used to ensure that a product is never out of stock, but also that too much stock is not being held, which can lead to high costs and wastage. The following are some of the main applications of minimum stock level:

  • To ensure that customers are not put off by a lack of availability;
  • To reduce the cost of holding too much inventory;
  • To ensure that stock levels are continually monitored and reviewed;
  • To reduce wastage due to overstocking;
  • To ensure that customers are not left waiting for stock to arrive;
  • To reduce the risk of overstocking and running out of stock.

Types of minimum stock level

Inventory management relies heavily on setting minimum stock levels. There are several types of minimum stock levels that may be applied to ensure the inventory of a product is maintained in an optimal way. These include:

  • Reorder Point: This is the point at which an order should be placed to replenish the stock of an item. It is calculated by taking into account the lead time, usage rate, and safety stock.
  • Economic Order Quantity (EOQ): This is the most cost-effective order quantity for a product. It is determined by analyzing the cost of ordering and the cost of carrying inventory.
  • Safety Stock Level: This is the amount of inventory held in reserve to prevent stock outages in case of unforeseen circumstances. It is typically set at a level that is sufficient to cover any expected demand.
  • Maximum Stock Level: This is the maximum amount of inventory that should be kept on hand for a product. It is determined by taking into account the cost of carrying inventory and the customer service level required.

Advantages of minimum stock level

Minimum stock level is an important inventory management concept that helps businesses maintain the right amount of inventory to ensure customer service levels. The following are some of the advantages of having a minimum stock level:

  • It helps to reduce the risk of stock-outs, as the minimum stock level is monitored and adjusted periodically in order to avoid stock shortages.
  • It helps to maintain an optimum inventory level, which reduces costs associated with carrying additional inventory.
  • It helps to ensure that customer needs are met in a timely manner.
  • It helps to reduce wastage, as the inventory is constantly monitored to ensure that it does not become obsolete.
  • It helps to reduce the cost of ordering, as the inventory is managed in such a way that it is ordered only when the stock falls below the minimum stock level.

Limitations of minimum stock level

Minimum stock level has some limitations, such as:

  • It is difficult to accurately forecast customer demand, which may result in unnecessary inventory being stocked and held.
  • The cost of maintaining a minimum stock level can be high, as the inventory must be purchased and stored.
  • The minimum stock level may be too high or too low, resulting in either a shortage or an excess of inventory.
  • It may be difficult to track and monitor the inventory levels, leading to problems with stock control.
  • If not managed properly, the minimum stock level can lead to distortion of the inventory data.

Other approaches related to minimum stock level

A minimum stock level is an important concept used to ensure that sufficient stock is available to meet customer demands. However, there are other methods to maintain optimum inventory levels. These include:

  • Just-in-time inventory management: This approach is based on the principle of ordering or manufacturing the necessary inventory only when it is needed, and in the exact quantities required. This reduces the burden of storing and managing large inventories and minimizes the risk of overstocking or understocking items.
  • ABC inventory analysis: This is a method of categorizing inventory items based on their importance. Items are divided into three categories: 'A', 'B' and 'C'. Items in the 'A' category are the most important and require the highest levels of inventory, while items in the 'C' category require the least.
  • Cycle counting: This is a method of regularly counting and verifying a portion of the inventory on a periodic basis, instead of counting the entire inventory in one go. This helps to ensure accuracy and prevent discrepancies in the inventory records.

In summary, there are several approaches used to maintain optimum inventory levels, including just-in-time inventory management, ABC inventory analysis, and cycle counting. Each of these methods has its own advantages and disadvantages, and should be carefully evaluated before being adopted.


Minimum stock level — recommended articles
Order point — Economic batch size — Ordering cost — Reorder level — Maximum stock level — Cycle stock — Safety stock — Optimum size of the order — Lot size

References

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