The Benefits of Min/Max Inventory Management in 2022
Summary: A definitive guide to setting stockroom min/max levels based on actual usage data from the point-of-use. This article defines ...Read Post
Summary: A definitive guide to setting stockroom min/max levels based on actual usage data from the point-of-use. This article defines Min/Maxes, how to calculate them, how modern VMI apps that track usage can optimize min/max levels, and what the financial benefits are to letting an auto-replenishment app like eTurns TrackStock dynamically set your optimized min/max levels based on your current usage.
The best way to ensure your point-of-use inventory (stockroom, onsite, truck, etc.) is optimized is by using min/max inventory management. At a basic level, the min/max method attempts to keep current on-hand inventory within a specific range. Users set a minimum stocking level, which, when breached, triggers a reorder to reach the maximum stocking level of a particular item. The calculation to reorder is straightforward: it’s the difference between the maximum and the quantity on hand minus what is already on order or on requisition.
Determining the levels at which you set your minimum and maximum depends on the answers to several questions. How quickly can your suppliers get material to you after you place an order? Is the usage of some items greater in the next month than four months from now? Which items need spares so that they never fall below two on hand?
A good job supervisor or an experienced tech can do a reasonable job of setting approximate minimums and maximums for any item as a starting point. These levels can be reset individually as time passes and the techs watch the inventory levels as they use parts. What typically happens, however, is that eventually there is a breakdown of communication and administration. As a result, the minimums and maximums are not adequately adjusted over time. Then, stock levels do not match reality at the POU stockroom. Too much of some items and too little of others results in wasted time and money from stockouts and overstock.
In a nutshell, tracking usage by hand generally ends up being wasteful and inefficient. To overcome this problem, companies need an app that can track usage automatically. Without an app that can take into account the reality of the consumption of material on the job, companies cannot truly reap the benefits of min/max inventory management. We need the ability to “tune” those min/maxes in order to optimize inventories and to maximize service levels. Said differently, we want to reduce inventory levels to the absolute minimum to save cash, while making sure we do not stock out of any item to keep the job moving.
For a demo of how eTurns can help you set more accurate min/max levels for your storeroom inventory, please contact us!
All industries who maintain inventory at the point-of-use strive for the same strategic objective: to reduce inventory to the absolute minimum without stocking out. The following industries can all benefit from deploying min/maxes to optimize their inventory:
The strategic objective is to optimize inventories and maximize service levels. These industries need an app that tracks consumption at the POU and uses it to their strategic advantage.
The minimum stock quantity of a particular item depends on several factors, including lead time, safety stock, contractual (blanket) orders, sales cycle times, seasonal demands, accuracy of sales forecasts, and the item’s review period.
In order to calculate min/max levels, good guide to start with is Minimum = Safety Stock + (Daily Run Rate * Lead Time).
However, the only way to set accurate minimum and maximum levels that will prevent stockouts and help optimize inventory levels is to calculate average daily usage. Modern inventory replenishment apps only need around 90 days of tracking consumption and lead time inputs to suggest a good starting point for accurate min/max levels that will optimize storeroom and truck inventory. Then the min/max levels need to be tuned and optimized with usage data. This leads to optimized inventory levels.
The benefits are clear. By optimizing levels, users benefit from one-time inventory reduction savings as well as annual savings from inventory carrying costs.
Having accurate min/max levels that help you maintain optimized inventory in your stockrooms is dependent on your ability to track the usage of each inventory item over a recent period of time. In addition, you need to account for these variables:
Average daily usage over the past 90 days is a great starting point for setting min/max levels, but they will also need to be constantly adjusted. One of the largest challenges in setting min/max levels without the use of a tracking app is the manual effort required to derive this very useful statistic: average daily usage. As soon as you calculate that number, how long would it take to then determine what the average daily usage is for 80 days or 120 days? It would require more hours than anyone has available. This is why, historically, these attempts at optimization analytics in stockrooms have been done at most once a year. Users need an app that can perform this calculation in three seconds so that they can spend their brain power on progressing to optimized min/maxes.
eTurns TrackStock is a mobile app that scans the barcodes of items that are being removed from inventory and used. It tracks consumption. By storing this data about item usage, in addition to the following important variables about your suppliers and your organization, the app can calculate optimal min/max levels for each item.
For instance, the app factors in lead time. Users need to evaluate their distributor or supplier’s performance on delivery time from order to receipt. If this period is two days, then perhaps the minimum levels should be set to four days of average daily usage to be conservative. This provides some buffer time for the typical item. TrackStock allows users to filter to those specific items that have longer lead times in order to to calculate what their minimums should be in comparison to typical items.
TrackStock also factors in supplier details. For instance, once users have an idea of what the minimums should be, they need to decide at what levels the maximums should be set. Are they twice the minimums? 2.3 times? 3.7 times? Again, it is dependent on a number of variables such as distributor or supplier performance, physical distance from the supplier, inventory turns, perishability, and more. TrackStock keeps track of all of these variables and calculates the optimized min/maxes.
TrackStock offers a min/max tuning slider for users who aren’t ready to immediately trust the automatically-calculated optimal min/max levels. Once TrackStock calculates the optimal min/maxes, the user can use the slider bar in the Min/Max Tuning Dashboard to gradually and conservatively move the current min/maxes toward the optimal ones. TrackStock allows the user to reset all of the min/maxes from the Min/Max Tuning Dashboard rather than entering each one manually.
After running with these new min/maxes for a month or two, the user can use TrackStock’s Min/Max Tuning Dashboard to recalculate what the min/maxes should be based on the most recent usage. The user can then use the slider again to move the current min/maxes closer to the optimized min/maxes, then set all the levels from the Dashboard again. When the user is close to the optimized min/maxes, the user can set the app to calculate the optimized min/maxes for each item and reset them automatically after each “Usage Pull” or after 24 hours if there were no Pulls. Either action will change the average daily usage since another day without a Pull will reduce the average. This responsive system allows for heightened accuracy and more efficiency.
TrackStock’s Min/Max Tuning Dashboard shows users how much money they can save in one-time inventory reduction as well as in annual carrying costs by moving to optimized min/max levels. To be honest, most of the customers we have surveyed are stocking 50+% more inventory than they need and they are amazed when TrackStock shows them exactly how much they could save in a one-time inventory reduction, based on the past several weeks or months of recorded usage. Customers have been able to reduce inventory levels up to 73% with optimization.
To make the Min/Max Tuning numbers accurate, users need to learn their company’s annual inventory carrying cost as a percentage of their inventory value. There are three categories of costs associated with annual carrying cost of inventory: fixed, variable, and other. Fixed costs are warehouse or supply room expenses and permanent staff managing the material. Variable costs include the taxes and insurance on the items. Other costs include inventory control, obsolescence, pilferage, and clerical costs. The industry averages range from 25% to 55% of inventory value.
Once the carrying cost percentage for the business has been determined, TrackStock adds it to the data it has on the average daily usage and the procurement variables. Then, TrackStock lists in the Min/Max Tuning Dashboard the actual cash savings available from a one-time reduction of the business's inventory, as well as the annual cash savings from reduced carrying costs.
One service contractor, Service America, reaped the following benefits in the first year using the eTurns TrackStock app. Read the Service America Case Study.
Each time the eTurns TrackStock app calculates the optimized min/maxes, it also provides an incredible array of statistics and reports for each item. These include: