Inventory Stock Levels: Types & Management Methods
The products you have stocked in your inventory are crucial assets for your business. Leaving them unattended or unaccounted for may cause you to lose money in the long run. Moreover, this could cause issues with your inventory stock levels. For example, many digital devices used in our day to day lives have been and are still being innovated continuously. In the past 20 years, many of their previous counterparts have become obsolete. Stocks that have been left in your inventory for far too long may experience the same fate, which is why it’s necessary to be able to sell them off in the most efficient way possible.
However, before you start optimizing your inventory stock levels, you must first be acquainted with its four types.
The Four Types Of Inventory Stock Levels
Minimum and Maximum Stock Levels
The first two types are the Minimum and Maximum Stock Levels. True to their name, they provide you with a definite range on the number of products you should have on hand. Failing to meet your Minimum Stock Level could easily result in a shortage of supplies. On the other hand, exceeding the Maximum Stock Level amount can be a definite identifier that you’re overstocking.
This means that failing to stay within the range they’ve provided could leave you in one of two scenarios. You’ll either fail to meet your clients’ demand for your products or have too many left in stock, which are at risk of becoming obsolete—and both situations aren’t good for your company. Fortunately, the remaining two types can help you optimize your stock levels even further.
Average and Danger Stock Levels
In order to determine your Average Stock Level, you must first establish a specific Reorder Point (ROP) for each product. Use your ROP to guide you when you’re identifying a definite date to reorder more supplies. This is true regardless of whether they’re raw goods or finished items. Once you’ve determined your ROP, you can then proceed to calculating your own Average Stock Level using this formula: Minimum Stock Level + ( ½ of your ROP) = Average Stock Level
Finally, there’s the Danger Level which serves as a warning that it’s time to reorder. This is usually established as a certain point between your Minimum Level and Average Level. However, other companies and industries acknowledge state that their products have hit the Danger Level when they’ve reached their Minimum Stock Level. Take into consideration various factors, such as your suppliers’ estimated delivery time, before you set your own.
Now that you’re familiar with the four types, you can begin incorporating them into your inventory management methods.
Inventory Management Methods For Optimizing Your Inventory Stock Levels
Companies often double-check whether the items in their warehouses or physical stores match their inventory records at the end of each year. This process, commonly known as inventory reconciliation, is a critical aspect of your overall inventory management process. Previously, Wasp Barcode surveyed over 1,100 Small and Medium-sized Businesses (SMBs). They found out that 46% of these SMBs either manually track their inventory items or don’t track them at all. And with the lack of automation, this can easily become one of the most time-consuming processes a company has. In order to fully optimize your inventory stock levels and minimize the discrepancies found in your records, consider the following:
Safety Stock Inventory
Other companies utilize the Safety Stock Inventory technique. Also known as Buffer Stock, these are extra products you keep on-hand to mitigate emergencies. This often comes handy when your supplier can’t deliver your goods on time or when more clients than expected are purchasing your products.
FIFO and LIFO
There’s also the Last In First Out (LIFO) method wherein companies sell newly acquired goods first. Companies who use this method work their way backwards. Consequently, they sell the first batch of goods they’ve acquired when all other batches have been sold as well. This allows companies who sell non-perishable goods to gain an increase in their profit since they’ve acquired them at lower prices than their current market value.
On the contrary, the First In First Out (FIFO) method follows the general principle that goods ordered first are also sold first. Companies often have their own FIFO Inventory System customized to their needs to manage their inventory and sales more efficiently. Furthermore, you can also optimize your inventory stock levels by easily incorporating a few strategies gained from the previous methods into your system. Its real-time updates on the number of goods you have in each of your physical stores serve an essential tool for demand forecasting. In turn, you’ll minimize the risks of having a shortage or overstocking your products. As a bonus, FIFO is also authorized by the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
For products manufactured and sold in bulk, companies can perform Batch Tracking. With this method, manufacturers are able to assign a single expiry date to a group of products made at the same time. This ultimately results in a more optimized product monitoring system and inventory stock levels for food wholesalers.
How Will You Optimize Your Inventory Stock Levels This 2020?
In the end, the most effective and efficient way to optimize your inventory stock levels is to stay on top of your stock levels. Make it a point to combine the right inventory management software and forecasting techniques. This will help you accurately forecast the number of goods to order from your supplier. Compute for the Average Stock Levels of your products. This can also serve as one of your bases for demand forecasting during your company’s operations. Learn more about other inventory management and analysis methods like the ABC, FSN, VED, HML, SDE Analysis methods as well.
While your inventory management software can generate reports it’s important to note that the data you receive from reports should also be complemented by your own intuition. With an informed idea of the actual and estimated demand for your products, you’ll be able to easily identify the appropriate stock levels and inventory management methods to use for your company.