Inventory management is one of the most important decision making and operational activities that a business needs to be in control of. A business of any scale, large or small, will definitely cut its losses and increase profitability if inventory is managed efficiently. A good help for this for large businesses is to use an ERP system that can give them better web based inventory control over the business and helping them overview everything related to minimum stock levels and reorder levels.
In comparison to small businesses, large businesses tend to have most of their operations based on the inventory available for use. This includes raw goods to be manufactured, inventory that is currently being manufactured, and finished goods that are ready for sale. All of these aspects need to be at a good equilibrium for a business to ensure productivity and profitability.
Without setting minimum stock levels, a company can run into shortages of inventory. This can create losses by delays in clients’ orders or losing clients’ orders completely!
Setting a Minimum Stock Level
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A minimum stock level is a quantitative figure of stocks that a business needs to have at all times. It is the least amount of stock that can still have a business running. Stocks at any level below the minimum stock level will create a shortage and can stop a business’s operations!
An ERP system can set a minimum stock level based on the needs of the business. This will ensure that the business’ operations are run smoothly and there are no margins of shortages that can create losses,
To set up the minimum stock level, we need to be informed about different levels and stock terms as well.
Factors Relating to Creating Minimum Stock Level
There are mainly three factors that are accounted for when calculating a business’ minimum stock level: Normal consumption, normal delivery time, and reorder level.
Normal consumption refers to the amount of stock used per a set time limit when business is run at normal capacity. For example, if a wood polishing company uses around 40kg of wood on average per week, the normal consumption would be 40kg/week.
Normal delivery time refers to the time it takes for an order to reach the business from its suppliers. For example, if I send out a purchase order to my wood supplier and it normally takes around 2 weeks for that order to be supplied, the normal delivery time of my business would be 2 weeks.
Reorder level is the level of stock a business must send an order upon. This is set between the maximum and the minimum stock level of a business. For example, if my business has a maximum stock level of 400kg (keeping any more stock would just be a waste of my storage resources), a minimum stock level of 30kg, and my reorder level at 100kg, this would mean every time my stock is at 100kgs, I should send out a purchase order for more inventory. If my minimum stock level is set correctly, the order should arrive before my inventory hits below 30 kg (minimum stock level).
Calculating Reorder Level
To calculate the reorder level of a business, two factors are needed: Maximum Delivery Time and Maximum Consumption.
Maximum Delivery Time refers to the maximum amount of time it can take for you to receive your goods from the supplier.
Maximum Consumption refers to the maximum level of consumption your business can do in a period of time.
The formula to calculate Reorder Level using this information is Maximum Consumption x Maximum Delivery Time.
For example, if my maximum consumption is 60kg of wood per week and my maximum delivery time is 4 weeks. My business’ reorder level would be 60×4= 240kg.
Calculating Minimum Stock Level
When you know your Re-order level, you can easily calculate your business’ minimum stock level. The formula for this calculation is Minimum Stock Level= Re-order Level – (Normal Consumption x Normal Delivery Time).
Using the examples above, my wood business has this information available:
Normal Delivery Time: 2 weeks
Maximum Delivery Time: 4 weeks
Normal Consumption: 40kg/week
Maximum Consumption: 60 kg/week
Reorder Level: 240kg
Note: Delivery Times and Consumption Rates are set based on past experiences of operations.
Hence, Minimum Stock Level will be 240 – (2×40) = 160kg.
This means whenever my inventory reaches 240kgs, I should reorder. My business operations may stop running if my inventory level reaches 160 kg.
Minimum Stock Levels in an ERP System
For large businesses, inventory management is extremely hard to do physically. All these calculations for many different products can be a waste of time and still be prone to errors. Using an ERP system, however, a business can benefit from calculations of all stock levels by intelligent ERP software. The cloud based ERP Software can also act as a reminder for emergencies revolving around stock levels by alerting the users when any critical situation arises. The ERP system helps you know the inventory count available, when to reorder, and all other aspects related to better inventory management.
This means an ERP system can become the backbone of a large business, sustaining all Inventory related matters, however, this can only be done in the most cost-effective and profitable way if you choose from the best ERP system.
CISERP is the best ERP system you’ll find available for your business. With hundreds of positive customer reviews and an intelligent processing database, with CIS ERP software your business can benefit by having everything in control. Inventory Management becomes easier than ever, moreover, you also benefit from better efficiency with accounting modules, payroll management, and much more! From reminding you on a reorder level to creating a purchasing order, recognizing the delivery of goods, and maintaining inventory records respectively, CIS ERP system can do it all!
Apply for an ERP system free ERP demo right now and help us create the best ERP system that suits your business perfectly, ensuring efficiency, profitability, and productivity!