#Average inventory formula opeartions how to#
How to calculate min and max inventory levels
All while keeping inventory costs down, cash flow moving, and profits as high as possible. These stock levels match your actual customer demand, so you always have enough inventory to fulfill that demand. Optimal inventory levels are the ideal inventory quantities your brand should have on hand. Inventory visibility becomes a greater challenge, making losses due to damage or theft more likely.Lower per-unit costs since larger orders typically mean you’ll get a wholesale discount.Higher holding costs (like storage, utilities, and insurance) to keep this excess inventory safe.Quickly fulfill orders because you’re not waiting on inventory replenishments.Risk buying too much of an unsellable item, leading to dead stock and unnecessary waste.Easier to meet customer demand and provide a better customer experience when you always have the products they want available.More inventory ties up working capital which could otherwise offset pitfalls or fund growth initiatives.Low risk of going out of stock thanks to excess safety stock.Anything more above that threshold is considered excess inventory and introduces unnecessary inventory risks (like higher costs and waste).Īs such, your maximum inventory levels should be calculated before you place a purchase order (PO) to prevent over-ordering. Maximum inventory levels are the ceiling amount of stock you should have on hand for each SKU. Incur increased freight costs when you have to transport replenishment inventory more often.Inventory visibility becomes easier, making losses due to damage or theft less likely.Higher per-unit costs when you order the minimum order quantities (MOQ) and don’t get a bulk discount.More inventory control because it’s easier to manage fewer SKUs at any one time.Plus, lower customer satisfaction rates when you don’t have what they want readily available. Lost sales and revenue if (or, more likely, when) stockouts happen.Lower inventory costs when fewer products take up space in your warehouse.High risk of stockouts, especially if demand outpaces your forecasts or supply chain disruptions cause shortages of finished goods or raw materials.Frees up working capital, so you have cash available to handle pitfalls or invest in growth initiatives.That way, you can ensure replenishment arrives before you drop below this minimum stock level.
Anything below this threshold means you might stock out and fail to meet customer demand that comes your way.Īs such, your low stock alert and reorder point should consider what’s happening with your supply chain and how variabilities affect your order lead times.
Minimum inventory levels are the lowest amount of inventory you should have for each SKU. There are 3 types of inventory levels you should track: Your minimum, maximum, and optimal levels of inventory. There, you achieve optimal inventory levels and only carry units guaranteed to sell. The sweet spot, then, is the point between too much and too little inventory. So, by the time you sell these units, chances are good that their margins will have shrunk, and you’re no longer making a profit. And the longer units sit in your warehouse, the more carrying costs they rack up, and the more likely they’ll turn to dead stock. Meanwhile, holding too much inventory requires a hefty up-front capital investment. During that stockout event, you miss out on sales and revenue if you don’t sell those products on backorder. By tracking your inventory levels, you can consistently meet demand without accruing unnecessary holding costs that diminish gross profits.įor instance, when your inventory levels are low, you won’t have enough inventory to fulfill all the demand that comes your way. “Inventory levels” refers to the amount of stock available throughout your distribution network. So, how can you find your optimal inventory levels? Let’s find out. AKA the goldilocks zone where your ecommerce brand can reach peak profitability. Somewhere between those 2 options are your optimal levels of inventory. Too little leaves you with stockouts, unable to fulfill demand. Too much inventory, and you’re left with dead stock that jacks up overhead costs. Managing inventory levels is a balancing act for direct-to-consumer (DTC) brands. Determine your business’ optimal stock levels to streamline inventory management practices and boost overall business performance.
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