This min-max inventory calculator helps you accurately determine your minimum and maximum inventory levels. Inventory levels are a critical part of supply chain management, helping to maintain an optimal balance between too much and too little stock and avoid an extra inventory carrying cost.
Minimum and Maximum Inventory Level Calculator
Inputs for the Calculator
To use this calculator effectively, you’ll need the following inputs:
- Re-ordering Quantity: The quantity of stock to order each time.
- Minimum Usage: The minimum amount of inventory used within a specific time frame.
- Maximum Usage: The maximum amount of inventory expected to be used.
- Normal Usage: The average amount of inventory used.
- Minimum Delivery Time: The shortest time for new stock to be delivered.
- Average Delivery Time: The average delivery time for restocking.
- Maximum Lead Time: The maximum time it may take to receive an order after placing it.
How Does the Min Max Inventory Calculator Work?
This calculator uses essential inventory metrics to calculate the minimum and maximum inventory levels. The minimum and maximum inventory levels are calculated separately using their formula. Here’s a breakdown of the calculations:
1. Re-order Level:
The re-order level is the level at which reordering is required to meet the current stock shortage. It’s calculated using:
Re-order Level = Maximum Usage × Maximum Lead Time
2. Maximum Inventory Level:
The maximum level helps prevent overstocking by setting a limit. It’s calculated using the following formula:
Maximum Level = Re-order Level + Re-ordering Quantity − (Minimum Usage × Minimum Delivery Time)
3. Minimum Inventory Level
The minimum level is a safety stock level, ensuring you have enough inventory to meet regular demand. It’s calculated as:
Minimum Level = Re-order Level − (Normal Usage × Average Delivery Time)
Why Calculate Minimum and Maximum Inventory Levels?
To manage inventory properly, you must calculate the minimum and maximum inventory levels your business should hold. Here’s why calculating these levels is essential:
- Avoid Stockouts: A minimum inventory level acts as a safety buffer, ensuring enough stock is available to meet demand during unexpected delays or surges.
- Control Costs: Setting maximum levels prevents overstocking, which can reduce holding costs and free up cash for other business needs.
- Efficient Reordering: Inventory level calculations help determine reorder points and quantities, leading to smoother purchasing operations.
Example:
Assume that a business has the following data to calculate its minimum and maximum inventory levels.
- Re-ordering Quantity: 200 units
- Minimum Usage: 20 units
- Maximum Usage: 50 units
- Normal Usage: 30 units
- Minimum Delivery Time: 2 days
- Average Delivery Time: 5 days
- Maximum Lead Time: 7 days
Using these values, the calculator would produce the following results:
- Re-order Level = 50 (Maximum Usage) × 7 (Maximum Lead Time) = 350 units
- Maximum Inventory Level = 350 + 200 – (20 × 2) = 510 units
- Minimum Inventory Level = 350 – (30 × 5) = 200 units
FAQ’s:
What is the Minimum Inventory Level?
The minimum level of inventory you should always hold to avoid stockouts and stop manufacturing is your minimum inventory level.
What is the Maximum Inventory Level?
The highest level of inventory your business can hold is your maximum inventory level. It’s not logical to hold inventories over the maximum inventory level.
What is the Re-order Level?
The re-order level is when new stock should be ordered to avoid running out. It is a predetermined point that signals when to initiate a reorder, ensuring there’s enough stock to meet demand during the lead time.
What is Lead Time?
Lead time is the time taken from when an order is placed until it is received and ready for use. In inventory management, lead time includes the time required for order processing, shipping, and delivery. Shorter lead times typically allow businesses to hold less inventory, while longer lead times require higher levels of safety stock to avoid stockouts.
What is Safety Stock?
Safety stock is the extra inventory kept on hand to protect against uncertainties in demand or supply chain delays. It acts as a buffer to prevent stockouts, ensuring that there is enough inventory to meet unexpected demand or delays in receiving new stock.
The formula for safety stock is:
Safety Stock = (Maximum Usage − Normal Usage) × Lead Time