What are the uses of inventory

How is the optimal inventory for a warehouse calculated?

The key to efficient logistics and avoiding additional storage costs lies in one optimal inventory. But what is the number of stocks required to adequately meet demand for a product without creating out-of-stock situations?

This article explains what the optimal inventory is and what differences there are between this concept and that Minimum and safety stock gives. The formula is explained in more detail in order to determine the inventory according to demand, the respective plant and the progressive growth of the company.

What is the optimal inventory and how is it used?

The logistical concept of the optimal inventory defines the exact amount of inventory a company needs to meet regular demand without out-of-stock situations. So it's about getting the maximum profitability while reducing inventory costs.

This concept cannot be compared with that of the Average stock which, as the name suggests, represents the average inventory in the warehouse. The optimal inventory is between the maximum inventory, i.e. H. the total number of items that can be stored in the facility, taking into account the area and storage systems, and the Reorder level or the minimum level, d. H. the minimum limit at which a company must reorder a product.

How is the optimal stock level determined?

What factors does the logistics manager have to pay attention to in order to determine the optimal inventory level? While these factors depend on the company's strategy, these are the four most important things to consider:

  • Customer demand: The logistics manager, together with the accounting and administration department, has to evaluate the development of demand over the last few years, the forecast of this demand for each type of item, its seasonality for each product, etc.
  • Stock turnover: The logistics manager must also know the handling of the individual article types so that he can correctly manage the storage locations of the goods. ABC classification is a common way of organizing stocks according to demand.
  • Type of product. The characteristics of each product and the industry in which the company operates are fundamental to determining the optimal inventory level according to the existing storage systems. For example, logistics in the food industry, where cold storage is required to ensure the quality of the goods, cannot be compared to the storage of cables or pipes, which requires specific storage systems adapted to the specifics of the products are adjusted.
  • Maximum stock, minimum stock and safety stock. The optimal inventory for each SKU can be calculated from these three values. The maximum stock is determined by the area, storage systems and handling equipment, while the minimum stock is determined by the demand and the capacity to manage each order. The characteristics of the company, on the other hand, define the safety stock that is required in every plant.
  • Lead time. The warehouse manager must also have the Lead time of the individual suppliers. This includes the waiting time between the generation of an incoming order for the warehouse and the delivery of the product by the supplier.

Since efficiency and the reduction of storage costs are becoming more and more important in logistics a lack of optimal inventory can have serious consequences for the companysuch as inefficient storage processes, costly excess inventory or the deterioration in the quality of inventory, especially if it is perishable.

Optimal stock, minimum stock and safety stock: what types of stock are there?

To understand the concept of optimal inventory, you must first be familiar with other concepts such as operational inventory, safety stock, or reorder point. Then we look at them different types of stocksaccording to the logistics strategy:

  • Available inventory: This is the amount of stock in the warehouse that is available for an order. All logistical processes are carried out with the available stock, also known as operational stock.
  • Minimum stock: The minimum stock is the minimum quantity of any product that the warehouse must have in order to meet the demand for a product.
  • Security distance: Every plant must have a safety stock so that an unexpected increase in demand does not lead to an out-of-stock situation.
  • Reorder point: The reorder level is a value defined in the logistics strategy that specifies when a product should be ordered from the supplier. It lies between the minimum stock and the optimal stock.
  • Maximum stock: This is the number of stocks that must never be exceeded in order to ensure the operation of the system. It depends on the storage capacity of the plant and the workforce available in the company.

Once these concepts are clear, the optimal inventory level can be calculated; H. the number of stocks that must be present in order for the company to achieve maximum profitability while responding to existing demand and any fluctuations.

The formula for an optimal stock

If the logistics manager has taken the aforementioned aspects into account, he must use the Formula for calculating the optimal stock Determine the quantity of each item that should be in stock. This is done on the basis of the optimal order quantity, to which the minimum stock and the safety stock that should be in the warehouse must be added. How these variables are determined is explained below.

The optimal order quantity is determined using the Wilson model, in which, based on the quantity and frequency with which orders are placed with suppliers, an optimal inventory management and raw material procurement should be achieved. The following formula is used to calculate this value:

Q is the optimal order quantity, D is the annual demand for the corresponding raw material, K is the cost of each order and G is the cost of storing a product for a certain period of time. Thanks to the Wilson model, the warehouse manager can determine when to place a new order.

In addition to the optimal order quantity, it is also necessary to determine the minimum stock of a warehouse and the safety stock. To find the minimum stock of a warehouse, the formula is as follows:

To this formula, you need to add the safety stock, which is calculated using the following variables:

  • Lead time of suppliers under normal circumstances (LTL).
  • Maximum delivery time in case of difficulties (MLS)
  • Average Product Demand (DPN).

Finally, the formula for the optimal stock is as follows:

Optimal inventory = optimal order quantity + minimum stock + safety stock

Example of calculating the optimal inventory level

The above formulas can easily be illustrated using a concrete example. A Company needs 80,000 screws per year for the production of sheet metal, which it then sells.

Every order that the company places with its screw supplier costs 100 euros, while the The cost of storing a screw is estimated at 5 cents per year. So what is the optimal inventory of screws that should be available in the systems?

As explained earlier, the first step in calculating the optimal inventory is to find the optimal order quantity. Using the formula where K (the cost of each order) is $ 100, D (the annual demand) is 80,000 screws, and G (the unit cost of storing one screw) is $ 0.05, Q gives a value of 17,888 Screws. This means the optimal order quantity for the company is 17,888 screws per order.

Q (optimal order quantity) = √ ((2 x 100 x 80,000) / 0.05) = 17,888 screws

In order to calculate the optimal stock level, the minimum stock available in the warehouse must then be determined. To do this, it must be determined how many screws the company needs per unit of time (per day). Assume that company is working on 250 days a year, it turns out that it 320 units per day needed. If the supplier's lead time is only one week, the required minimum inventory is consequently 2240 pieces.

Minimum stock = (80,000 / 250) x 7 = 320 x 7 = 2,240 screws

Finally, the safety stock of the warehouse is calculated. If the maximum delivery time from a supplier under abnormal conditions is 21 days, should be the safety stock 4480 screws be.

Security distance = (21-7) x 320 = 4,480 screws

As a result, the optimal stock 24,608 screws and results from the addition of the optimal order quantity (17,888), the minimum stock (2240) and the safety stock (4480).

Optimal inventory = 17.888 + 2,240 + 4,480 = 24,608 screws

Digitization of the optimal inventory

The digitization of logistics processes made it possible to automate numerous tasks that a few years ago still meant errors and lost time for operators. The implementation of a ERP systems (Enterprise Resource Planning System) are the key to the integrated management of orders in stock. With him, inter alia. the needs of each product and the lead time of the individual suppliers can be determined. The ERP system therefore supports the logistics manager in calculating the optimal inventory and the optimal order volume for each supplier.

Once the optimal inventory has been calculated for each of the item types, a Warehouse management system (WMS) automatically set priorities for processes such as replenishment at picking stations, the acceptance of incoming orders in the warehouse and even for the management of the production line in the plant.

In addition, these applications determine the optimal inventory level for each item type, which automatically creates replenishment tasks for those item types that are below the preset limit. A LVS also automatically stores the products in the warehouse based on their characteristics (Product turnover, batch or expiry date), which reduces errors and increases the productivity of the system.

Precision and flexibility: the crux of Logistics 4.0

In an increasingly demanding logistical and industrial environment, logistics managers need to reduce storage and order picking costs to stay competitive. For this reason, the Use of aids such as the optimal stock level, errors and additional costs are avoided, ensuring there is enough inventory to meet demand for each type of item without incurring unnecessary costs.

In addition, solutions for the automation of processes are being used in more and more warehouses. Once the optimal inventory has been calculated, a LVS together with an ERP the planning of orders to suppliers, the timing of replenishment tasks at the parking spaces and numerous other advanced functionalities.

At Mecalux, we have developed Easy WMS, a WMS with numerous applications for the logistics sector. If you would like to make the processes in your company more efficient and have optimal control over your warehouse, then contact us. One of our experts will advise you on the best digital solution for your company.