Stock Level

The “Min” value represents a stock level that triggers a re-order and the “Max” value represents the new targeted stock level following the re-order. The difference between the Max and the Min is often interpreted as the EOQ (Economic Order Quantity). Moreover, while Min/Max inventory planning is quite a crude method for inventory order, Min/Max settings can be dynamically adjusted to offer better inventory performance.

Maximum Stock Level

To avoid cash being tied up in holding unnecessary high levels of stock, some businesses set up a Maximum level of stock to be held at any one time. The formula to determine the maximum level of stock to be held is:

Formula = Reorder level – {minimum usage x minimum lead time} + reorder quantity.

An example of how to calculate the maximum level of stock:

• Reorder stock level is 25,000 units.
• The business has a minimum usage of 1,000 units per week.
• The minimum lead time is 3 weeks.
• The reorder quantity is 12,000
• Requirement: Compute the maximum level of stock of TX1 to be held at any time.

Maximum level of stock to be held:

= Reorder level – {minimum usage x minimum lead time} + reorder quantity

= 25,000- {1,000 x 3} + 12,000 = 34,000 units of TX1

Minimum Stock Level

The purpose of keeping minimum stock levels is to enable the stock controller to avoid running out of stock.

Formula=Reorder level – {average usage x average lead time}

Illustrated example on how to calculate minimum stock levels:

Continuing from the above-re-order stock level are 25,000 units.

The business has an average usage of 1,200 units per week.

The average lead-time is 4 weeks.

Minimum level of stock to be held:

= Reorder level – {average usage x average lead time}

= 25,000-(1,200 x 4) =20,200 units of TX1

Safety Stock Level

The purpose is to ensure that the business never runs out of stock. A safety stock level should be maintained. Safety stocks are also known as buffer stocks.

Example: assuming the business required buffer stock of 2,800 units, then the minimum level stock to be held would increase to 23,000 units of TX1.

Re-Order Levels

The inventory level is set to trigger the re-order of a specific item. A re-order point is generally calculated as the expected usage (demand) during the lead-time plus safety stock. A fixed re-order point implies a re-order point is a static number entered into the system. A dynamic re-order point implies there is a system calculating the order point. Generally, this would be by comparing current inventory to the forecasted demand during the lead-time, plus safety stock.

Calculate your re-order point

The re-order point is the threshold at which you should order more products to prevent shortages, while also avoiding overstock.

This re-order point formula will help you quickly calculate when you should reorder a specific product. The reorder point is calculated using this equation:

Re-order Point = (Lead Time + Safety Stock + Basic Stock) * Unit Sales Per Day

Lead Time: The number of days between issuing a purchase order and receiving the product(s).

Safety Stock: The number of days’ worth of inventory you keep in case of emergency.

Basic Stock: The number of days’ worth of inventory you normally keep on hand.

Unit Sales Per Day: The average number of products you sell each day.

Fill Rate

This is the percentage of customer or consumption orders satisfied from stock-at-hand. It is a measure of an inventory's ability to meet demand. It is also called the demand satisfaction rate.

A fill rate is a measure of the depth of demand that was satisfied by the inventory on hand. For example, a customer orders 20 units of SKU 2677, but the seller ships the 15 units it has. The fill rate equals 15/20 = .75.

An out-of-stock situation occurred, but demand was partially filled. From this simple example, a large number of combinations exist in how to create fill rate measures. Fill rates can be evaluated bylines on an order, by SKUs, and by cases shipped. These fill rates can then be averaged across different periods and across different facilities within different geographic regions.

Owing to the tremendous variety of measures, there is no standardized fashion for using and reporting fill rates. Businesses, of course, should measure fill rates to manage availability inventory, but different companies adopt different models to fit their specific operating context.

Fill Rate Example

Suppose we have the two invoices, as seen below:

The case fill rate of 70.23% on invoice 1 and 69.44% on invoice 2 are evaluated across SKUs.

The line count fill rate, which shows an out-of-stock situation, equals 60% on invoice 1 and 33.3% on invoice 2.

We can then average these measures across invoices. The case fill rate equals 69.87% = (295+250) / (420+360).

The line counts fill rate equals 50% or (3+1) / (5+3).

The fill rate across invoices for SKU 501 equals 93.75% = (50+100) / (50+110). Fill rates can similarly be drafted for each individual SKU.