Stock levels are an important part of inventory management. They refer to the quantity of goods that a business holds to meet customer demands while minimizing costs. An adequate stock level can reduce a business’s costs, improve cash flow, and increase brand value in the market.
Manually managing stocks is a time-consuming process that can lead to errors. A company can manage stock levels efficiently by combining advanced technology, data analytics, and collaboration with suppliers.
If a company doesn’t track stock properly, it either loses sales because there’s nothing to sell or locks up cash in excess inventory. Good stock management isn’t just about numbers; it’s about keeping the business running smoothly.
What Is Stock Levels?
Stock levels refer to the quantity of goods available in inventory at a specific time. It helps businesses manage supply, demand, and replenishment efficiently.
The right stock level is the most important thing in inventory management because that creates a balance between supply and demand. Maintaining stock levels helps to avoid problems like overstocking and understock issues.
Overstocking can make the product obsolete or raise storage and insurance costs. Out-of-stock issues can decrease customer satisfaction and decrease brand value.
Maintaining low stock levels or just-in-time inventory management can result in cost savings, improve cash flow, and increase flexibility. It can even mitigate risks related to a business’s supply chain management.
Different Types Of Stock Level
Managing appropriate inventories in the warehouse is essential for a business. There are five main types listed below.
1. Minimum Stock Level
It represents the lowest level of stock that should be maintained in a warehouse before placing a new order for storage. If the stock goes below the minimum level, then it will create stock-out issues, which can satisfy customers.
There are three key components of the minimum level.
- Reorder Level
It is the stock level at which new orders need to be placed to replenish inventories.
Reorder level = Maximum usage * Lead time
Maximum usage is the highest number of products sold per day.
Lead time is the time taken for the new stock to arrive in the warehouse.
- Average Usage
Average usage is the total number of products consumed over a given period.
- Lead time
It is the time taken for a new stock to arrive in the warehouse after placing the order.
Formula For Minimum Stock Level
Minimum stock level = reorder level – (Average usage * Lead Time)
Let’s discuss an example
Reorder level = 500 units
Average usage = 50 units per day
Lead time =6 days
So minimum stock level = 500 -(50*6) = 200 units
2. Maximum Stock Level
It is the maximum amount of stock that needs to be maintained in the warehouse to avoid overstocking problems.
There are four key components of the maximum stock level.
- Reorder level
It is the stock level at which the warehouse staff places a new order.
- Reorder Quantity
It is the number of units that a warehouse staff orders every time when the stock reaches the reorder level.
- Minimum Usage
The lowest number of products sold per day.
- Lead time
Time required for the new stock to arrive in the warehouse.
Formula Maximum Stock Level
Maximum stock level = Reorder level + reorder quantity – (Minimum usage* leadtime)
For example, a business has the following data.
- Reorder level =500 units
- Reorder quantity =600 units
- Maximum daily usage of the product =40 units
- Lead time =6 days
Maximum stock level = 500 + 600 – (40 *6) = 860 units.
The business should not hold more than 860 units; otherwise, it will create overstocking issues.
3. Reordering Stock Level
It is the inventory level at which new orders need to be placed to replenish the stock in the warehouse before it becomes a shortage.
Formula For Reordering Stock Level
Reordering level = maximum usage * Lead Time
Here, maximum usage means the total number of stocks sold out per day.
Lead time is the duration the stock will take to arrive in the warehouse.
Let’s discuss an example
Maximum daily usage of the product in a business = 80 units
Lead time =6 days
Reordering level = 80*6 = 480 units
4. Average Stock Level
It includes the average amount of stock maintained for a certain period.
Formula For Average Stock Level
Average stocking level = Minimum stock level + ½ (Reorder quantity)
Example
A clothing store has minimum stock level =200 units
Reorder quantity =500 units
So Average stocking level = 200 + ½ (500) = 450 units.
5. Danger Stock Level
If the stocks in the warehouse go below the minimum stock level, then it reaches a danger level. Management needs to take immediate action to replenish stock immediately to prevent stockout issues.
Formula For Danger Level
Danger level = Average consumption * Maximum reorder period for an emergency purchase.
Example
A factory consumes 200 units of automobile parts. It takes almost 5 days for the supplier to supply the stock.
Danger level = 200*5 =1000 units.
The factory needs to order products when the stock level reaches 1000 units.
Why Is Calculating Stock Level Important For Business?
1. Enhances Customer Satisfaction
Sufficient stock levels in a warehouse can fulfill orders on time. This enhances customer satisfaction and increases brand reputation in the market.
2. Avoids Stockout issues
Insufficient stock in warehouse storage can lead to lost sales and satisfy customers. Hence, an optimal stock level is essential for brand growth in the market.
3. Pricing Strategies
Optimal stocks in the warehouse determine the product price of a business. For example, high stock in a warehouse can offer discounts to customers and thus can increase sales.
4. Optimizes cash Flow
Excess stock can block the capital of a business. It can be used for product development or targeting a new market. Again, low stock can lead to rush orders and high investment. So, a proper stock level is essential for optimizing cash flow.
5. Supplier Relationships
Maintaining constant inventory levels requires proper communication with reliable suppliers. This strengthens the relationship between a business and its suppliers. The business can negotiate the rates while ordering goods or products.
6. Minimum Obsolescence
Just-in-time inventory management techniques in a business can sell out perishable items faster. Timely sales of products can prevent them from getting spoiled or outdated.
Best Strategies For Stock Level Management
A business can use the following strategies for effective stock-level management.
1. Adopt Just In Time Technique
Just in time technique indicates that you should order products only when required to prevent overstocking problems. This concept requires close collaboration with the suppliers so that they can provide products on time.
2. Demand Forecasting
You should analyze the historical trends and sales and then forecast product demand in the market. This will help to maintain the correct amount of stock inside the warehouse logistics. However, manually forecasting product demand in the market may involve errors. A business can use AI to predict product demand in the future.
3. Monitor Inventories In Real Time
Businesses need to monitor inventories in real time to prevent shortages. They should use advanced software, such as a warehouse and inventory management system.
4. Classify Inventories Based On ABC Analysis
Businesses can classify their inventories based on ABC analysis.
- A – items are highly valuable and in low quantities. You need to monitor them very closely, as they are usually replenished quickly.
- B – items are of moderate value and are usually present in moderate quantities in the warehouse. You need to review them almost periodically to ensure the proper amount of stock is there.
- C – items are low-value and present in large quantities. You need to order these items less frequently.
5. Avoid Dead Stock
Deadstock can cause waste and financial losses to the business. You need to offer discounts for slow-moving items so that they can be sold out quickly.
5. Establish Safety Stock Levels
Sometimes, the demand for a product may rise suddenly. Insufficiency in the warehouse can decrease brand reputation. In such cases, a business should keep safety stock in hand to meet customer demands.
Conclusion
Optimal stock level means the number of inventories that need to be in the warehouse to meet customer demands without stock-out issues. It can maximize profit and reduce the business’s warehouse costs. However, a company needs to adopt modern technology, such as an inventory management system, to track products in real-time inside a warehouse. It provides instant updates on inventory movement and can reduce stock out and overstocking issues.
AAJ Supply Chain Management
