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Set your Inventory Levels

Establishing of any organization has following mottos
a) Investment of Funds
b) Generating Revenue
c) Producing Products to cater the market
d) Keeping every customer satisfied
e) Capturing Lions share of the market
f) Social Service
g) Etc.,
Success and failure of any company depends on the end
customer/consumer. If the End customer is connected to the
organization and consuming the product regularly and repeatedly is
called a satisfied customer and who normally doesnt change the brand.
What makes the consumers intact with the brand or any product?
There are many factors which buildup the brand, few of which are as
under
a) Marketing activities, which are repeated and visible across the
market,
b) Promoters of the organization,
c) Product need of the market,
d) Product Quality at a price,
e) Customers Services,
f) Availability of products.
You do good marketing activities, you launch a market friendly products
and need products, you give quality also, but if you fail to provide the
material in time, do you think your organization will have good Brand
image. Yes, your organization will be known, but for a poor product
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Set your Inventory Levels

availability. Therefore foremost thing for any organization is to have
healthy product availability. Customer doesnt wait for anyone.
Todays market provides the customer with lot of choices. If he doesnt
get one choice, he is offered another choice. There is 99% chances that
once customer is denied of any product, he will not wait. He will search
for another alternative.
So availability of goods is must for any organization. Availability is
determined by the following tools
a) A better Sales forecast, so that product are produced as per the
demand trends,
b) Planning according to Sales Volumes. Categorize the items
according to the sales volume. Apply Pareto analysis for
classification. A Class Items, as a thumb rule will be only 20%,
contributes to 80% of the total sales and are needed to be
monitored every week, B Class and C Class consists of 80% of
the items contributing to 20% of the sales. But these Items are
mainly High Value produced, consumed less and are catalysts. In
B and C also apply Pareto and keep all the A always in stock.
c) Defining Stock Levels. This is the most important aspect to ensure
availability of material in time.
As a simplistic system, we have four levels of inventory control levels
a) Minimum Level/Safety Level
b) Re-Order Level
c) Maximum Level

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Set your Inventory Levels

The above graph represents the inventory levels. In the present times
minimum level has been replaced by the Safety Stock Level.
a) Minimum / Safety Stock This is the mimimum level which we
can keep in stock and need to be address immediately to avoid
any sales loss. This level is the result of stock not being anticipated
at a higher level or due to un-expected demands. Safety Stock
depends on demand Variability and not demand rate. The stock
level should never come to this level. It is basically a warning of
low stock. Minimum Stock/Safety stock level may vary from one
class of Item to another. Like in case of A class of item, it may be
5 days, where as in case of B and C it may be more than 15 days
of the stock, depending on liquidation of the stock.

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Set your Inventory Levels

Safety stock depends on two important factors, first what % of

customer service level you want and secondly on the variability of
demand (MAD or SD). SD = Average Demand
Mathematical formula for calculating Safety stock is as under
Safety Stock = Customer Service Factor X MAD X Lead time
Where Customer Service Factor, is the level you want to keep for
your customer satisfaction. It may be 90%, 99% or 100%.
MAD Mean Absolute Deviation It is a simple assessment of the
variability of the demand pattern, (Sum of Absolute deviations
from mean Number of per periods included in the sum)
Lead time It is the time between a shortage occuring and items
being availabile to maintain supply. The lead time for the supply is
a balance between what the supplier wants and what the
customer wants. If the suppliers are dominating and influencing,
they will set a long lead time and if the customers are more
demanding then they will force for immediate supplies. Both of
these normally increase the operating capitals. Keep the lead
time realistic is the mantra.
b) Re-Order Level This is most important level to control in any
inventory control system. It is the level, where most of the
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Set your Inventory Levels

planning of replenishment should be done. If you miss this, you
will be only firefighting.
Re-order Level (Review) = Usage Rate X Supply Lead Time +
Safety (Minimum Level)
c) Maximum Stock Level It depends on company to company.
Some keep stock of 30 days as maximum and some others may
keep the maximum stock level upto 1 years also. It all depends on
- Lead time
- Criticality of the item
- Shelf life of the Item
- Demand of the customer
- Compulsion due to demand variability
- Availability of material
- Seasonality
- Transportation
- Purchase rate
- Etcs.
At the end of the day, it matters how you serve your customers and
how much sales loss is converted into healthy Sales. You should keep
equilibrium between Stock availability and Sales happening.

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Set your Inventory Levels

About author
Rajinder Singh Mann, B.Sc., PGDCS, MBA, MPhil. Having Experience of 25 years
in S&OP, Education, Logistics, SCM. Has worked in diverse industries like
Publishing, Fasteners, Paints and Varnishes, Food Processing, Education and
Training, Steel wares and Table-wares. Presently associated with Ceramics
Industry heading Supply Chain Department.

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