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Inventory management is an important part of supply chain management. Inventory management can be very vaguely described as optimizing the inventory level between maximum and minimum acceptable levels for every SKU.
- The maximum stock is determined by the storage capacity of the warehouse and the supply requirements.
- The minimum stock indicates when and where a new order needs to be made. This is the reorder point.
The minimum-maximum model
With the minimum-maximum method, a point of supply is fixed, which, following the consumption of the goods in stock, allows the order to be fulfilled in order to maintain the right stock levels.
This is easily automated using ERP and WMS systems.
This way, when an SKU reaches the minimum stock levels, the system sends a notification or automatic re-supply order.
There are several methods and parameters we can use for establishing the minimum stock level, such as:
- Demand forecast or
- Lead time, which is the delivery time utilized by the supplier
Regardless of the indicator used, seasonal adjustments may also need to be made.
The minimum-maximum stock method has some flaws:
Firstly, this model starts from a perspective focused on each SKU, without considering the overall status of the inventory or supply situation. There might be a vendor that has a policy that provides for a minimum order quantity and frequency, which if not met or exceeded results in additional surcharges. With the minimum-maximum stock approach, the order would be issued only once the “minimum spend” or “minimum order quantity” indicated by the supplier has been reached, which is not economically advantageous.
Secondly, it does not always take into account the product development cycle. Each part goes through a life cycle with different phases that influence demand (introduction, growth, maturity, and decline). Unless the minimum-maximum stock rule is under continuous manual review, continuously applying replenishment could mean accumulating expensive oversupply.
Benefits of minimum-maximum stock management
One of the consequences of applying a strict minimum-maximum escort policy is to avoid accumulating more materials than is necessary.
Firstly, it decreases the capital held in stock by freeing up economic resources that can be invested in other aspects, increasing the liquidity of the company.
Secondly, storage costs related to stock conservation are reduced. In addition, the risks of obsolescence related to the resources in the warehouse are better controlled.
Lastly, you can free up storage space to expand your catalog, upgrade your picking area, or invest in purchasing the materials you really need.
How to optimize inventory to keep a minimum stock?
By reviewing and classifying inventory stored according to their rotation cycle, it is possible to identify slow-moving materials that can make inventory management inefficient. In this sense, warehouse management software allows you not only to perform cyclical and accurate inventory counts but also to always have a valuable history that will greatly facilitate inventory optimization activity. In addition, the management of this information will be of great help in prioritizing minimum inventory to optimize the most important codes based on different logistical parameters such as profitability margins. In this way, the minimum stock of each reference is calculated from a global and not an individual point of view: individual materials are purchased on a single budget (they share the same investment).
2. Not just numbers: plan considering all the logistical factors
In some cases, the minimum-maximum model works in an invisible way, especially if it has been automated. However, we recommend that you plan replenishment taking into account all the factors that affect logistics operations and not just the inventory levels. Otherwise, the warehouse may be overloaded upon receipt of the goods. If an order placed to the vendor is configured to happen automatically at the SKU level, the company will lose the benefits of volume or bulk purchase.
Having a WMS allows the warehouse to better handle unplanned inbound shipments while also managing the arrangement of goods on shelving and racks.
3. Focus on a more efficient warehouse with lower operating costs
The main function of stocks is to provide the company with the ability to respond to product demand at the right time and in the appropriate ways. There are strategies designed to optimize the amount of stock in stock – such as the “just in time” model – however, the storage of the goods for some time remains necessary for the smooth operation of the supply chain. Since maintaining the minimum stock is almost always essential, operating costs must be reduced by reducing the time when goods remain stationary in stock.
A good approach is to work for warehouse efficiency by improving delivery times or lead times.
- Lead time of the real transport of goods from one place to another. The automation of warehouse processes such as load handling will free up operators who can devote themselves to more complex and less repetitive tasks.
- Lead time of information, which is the time it takes to process orders, create picking lists, and establish a hierarchy of priorities. A WMS is the ideal tool to reduce cycle times and to streamline warehouse operations.
The importance of controlling stock levels should be stressed as it serves to prevent the dreaded breakdown of stocks and the oversizing of safety stocks.
A few final words
The financial impact of stockpiling and the increasing variability of demand have forced many companies to change their stock management policy. Trying to adapt to an increasingly demanding reality involves integrating advanced software into logistics management, as well as making strategic decisions on accurate data.
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