Efficient inventory management lies at the core of successful supply chain operations for any business. Balancing the delicate equation between supply and demand is essential to prevent stockouts and overstock situations. Two important concepts in this realm are target stock and excessive stock. Both play pivotal roles in ensuring that a company's inventory remains optimized and aligned with its overall business objectives.
Target Stock/Max Stock
Target stock, also known as target inventory or desired stock level, represents the ideal quantity of a product that a business aims to keep on hand to meet customer demand while avoiding stockouts. This figure is determined through a combination of historical sales data, demand forecasts, lead times, and desired service levels.
Versa uses target stock as Maximum Stock.
The primary goal of maintaining target stock is to strike a balance between the costs associated with holding excess inventory and the risks of not having enough inventory to fulfill customer orders promptly. Several factors influence the determination of target stock levels:
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Demand Variability: If a product's demand fluctuates significantly, a higher target stock might be necessary to provide a buffer against unexpected surges.
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Lead Time: Longer lead times from suppliers might require maintaining a higher target stock to account for the delay in replenishment.
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Service Level: The desired service level, often expressed as a percentage, indicates the probability of having enough stock to meet customer demand. A higher service level usually corresponds to a higher target stock.
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Seasonality: For products with seasonal demand patterns, the target stock might be adjusted to accommodate increased demand during peak seasons.
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Economic Order Quantity (EOQ): Calculating the EOQ helps determine an optimal order quantity that minimizes the total cost of ordering and holding inventory, contributing to the determination of target stock levels.
How Versa Calculates Target Stock
Versa can automatically calculate target stock for you. This is calculated per inventoried product and per facility. Versa also use this target stock as maximum inventory in your reorder points. The formula is as followed.
Average Daily Sales x (Average Lead Time + Review Period) + Safety Stock
The review period, also known as the review cycle or reorder cycle, refers to the time interval between successive reviews of inventory levels to determine if replenishment orders need to be placed. In the simplest case, this can be the average number of days between your purchase orders. You can set the review period as part of the Reorder Point setting for a product or set this for all products in Setup, Feature Settings, Inventory Management.
Average Lead Time is the average lead time between placement of PO and receipt of the inventory.
Safety Stock is a system calculated metric .
Excessive Stock
Excessive stock, also referred to as overstock or surplus inventory, occurs when a business holds more inventory than is necessary to meet current or anticipated demand. This situation can result from factors such as overestimating demand, incorrect demand forecasting, unexpected shifts in customer preferences, or ineffective inventory management practices.
Excessive stock can lead to several adverse effects:
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Increased Holding Costs: Storing surplus inventory ties up capital and incurs additional costs such as warehousing, insurance, and maintenance.
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Reduced Cash Flow: Excessive stock ties up funds that could be used for other business activities, impacting cash flow and hindering growth opportunities.
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Risk of Obsolescence: Products held in excessive stock might become obsolete or outdated before they can be sold, resulting in potential write-offs and losses.
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Decreased Profit Margins: Heavy discounts might be necessary to clear out excess stock, potentially leading to reduced profit margins.
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Limited Storage Space: Overstock situations can lead to congested warehouses, making it challenging to manage and retrieve inventory efficiently.
How Versa Calculates Excess Stock
Versa can automatically calculate excess stock for you. This is calculated per inventoried product and per facility. The formula is as followed.
Current Inventory minus Target Stock
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