Q. Why is inventory management important?
A. Because every stock in your inventory is MONEY💰
Every item in your inventory is money, therefore, managing your stock inventory is the key to a successful business. However, because it is difficult to predict customer demand, ending up in stockout isn’t so surprising. Not only that but also, a lead time isn’t always stable and inaccurate inventory forecasting is another common difficulty in inventory management.
So, what can be done to prevent such exhaustion?
Knowing your inventory’s Safety Stock and Optimum Inventory Level.
What is Safety Stock?
Safety stock is the number of extra stocks held in your inventory to prevent stockouts caused by unexpected emergencies such as the unpredictability of customer demand.
Why is Safety Stock important?
As much as forecasting the inventory based on customer demand is crucial for all businesses, it is difficult to build a blueprint of stock in/outs since the demand is constantly fluctuating by numerous factors. Moreover, replenishing stocks in an emergency will cause additional expense since factories, shipment, management needs to be input unexpectedly.
But most importantly, safety stock may play a big role in satisfying customer’s demand.
“Out of stock?😠”
“We apologize, but it may take some time to restock it.”
“How long?”
“About..3 weeks?”
-Your customer has left the chat-
Thus, with safety stock in your hand, you won’t have to feel sorry for your customers to be walking out empty-handed.
Moreover, another emergency that can lead to stockouts is missing the timing for a reorder point, which is why optimum inventory level is also another important tip for your inventory.
Optimum..what?
Optimum inventory level is an adequate amount of stock quantities to be held in your inventory for an economize as much as possible. So basically, it’s about knowing your inventory’s reordering point. But the problem comes with the adjective, ‘adequate.’ From a general safety stock calculation(which will be described below), a business with a daily average of 10 shoe sales may have to stock 90 pairs. This doesn’t become a problem since shoes don’t easily perish.
However, when it comes to food with short shelf life, like vegetables or fruits, stacking up isn’t the most ideal inventory optimization since they will go bad soon. So, it’s better to know its optimum inventory level and know when is the appropriate reorder point to prevent stockouts.
All in all, not only you may have to hold extra stocks, but also know the adequate stock level based on the attribute of the product you handle.
Aren’t they the same thing?
Both have in common of preparing your inventory from a stockout.
But the optimum inventory level is to prevent stockout and safety stock is to handle the stockout.
Calculating Safety Stock
General equation: (Max Daily Sales x Max Lead Time in Days) — (Average Daily Sales x Average Lead Time in Days) = Safety Stock
(Lead Time is a product’s manufacturing time from beginning to end.)
Let’s apply this equation into an example.
Let’s say you have a shoe store. An average lead time to make a pair of shoes takes 5 days and 7 days maximum. The average daily sales of the shoes are 10 pairs and 20 pairs maximum.
- Max Daily Sales: 20
- Max Lead Time in Days: 7
- Average Daily Sales: 10
- Average Lead Time in Days: 5
With the equation above, the safety stock for your shoe store would be, (20 X 7) — (10 X 5) = 90. Since you sell 10 pairs of shoes per day on average, you will be able to sell your shoes regardless of stockouts despite the maximum lead time of 7 days with your safety stocks.
*Please refer to this reading to know more about safety stocks: http://web.mit.edu/2.810/www/files/readings/King_SafetyStock.pdf
(The given safety stock equation above is one of the many equations to figure out the optimized safety stock quantity. Adopting an equation appropriate for your business is highly recommended.)
But even if I know the safety stock and reorder point, keeping track of all those quantities is too much work! 😫
Low Stock Reminder
In BoxHero, a simple inventory management solution, you can receive a notification🔔 by inserting a quantity for a low stock reminder. (See more)
You can also check the quantity status on the BoxHero web. Bulk editing several products at once is available on the web as well.
