“How much inventory should I have?” This is one of the most common questions among businesses. Having too much inventory on hand can result in damage to the products. On the other hand, having too less can lead to disappointment in the customers. Therefore, it is important for all businesses to have just the right amount of inventory to ensure enhanced business operations. In this blog post, you will explore how to find out the inventory level that you must maintain.
How Much Inventory Should You Have On Hand At Any Given Time?
Finding out how much inventory should I start with is really challenging. However, there are various ways to find out the amount of inventory that must have to fulfill the requirements of customers on time. Here are some of the best ways. Let’s take a look!
One of the easiest ways of knowing the inventory you need at a specific point in time is to use technology. With the inventory management software, you can easily determine the current stock level. It can also notify you when you run short of inventory and allows automatic reordering of the items. The inventory management software ensures that you have the right inventory. It improves your relationships with the vendors and suppliers and helps in avoiding excess inventory.
Demand planning is another effective way of knowing how much inventory you should have. Demand planning is all about making predictions relating to the demand for products among the customers over a period of time. To determine the customer demand effectively, you need to collect data such as seasonality, historical trends, marketing and promotions, and competitive landscape. It allows you to accurately find out the number of stocks you must have on hand.
Determine Restock Lead Times
Basically, there are two lead times that you will have to determine. It includes the supplier lead time and the internal lead time. Internal lead time involves factors like receiving time, put away time, inspection time, and display time. On the other hand, supplier lead time is the time between placing an order with your supplier and getting the items delivered to your warehouse.
How To Calculate The Right Amount Of Inventory For Your Business?
Are you wondering how to find average inventory? Well, there are various calculations that can help you find the right inventory amount for your business. The important calculations are listed below.
Inventory Turnover Ratio
It is one of the simplest ways of finding the right inventory level. All you need to do is divide your sales by average inventory.
Related: What Is A Good Inventory Turnover Ratio For Retail?
Days Sales of Inventory (DSI)
Calculating the day's sales of inventory is quite simple and easy. All you need to do is divide your inventory by the cost of sales. Then you will have to multiply the resultant by 365.
To calculate safety stock, you will have to first find out the average of the top 3 days’ sales volume in the previous year or month or quarter. Then you need to subtract the average daily volume of sales for that specific period.
To find out the reorder point, find the lead time. Then multiply it by the average daily sales volume over the past month or year, or quarter. Finally, add the safety stock number.
What Factors To Consider When Determining How Much Inventory To Carry
When it comes to finding the inventory level to have on hand, there are several factors you need to take into account. Some of the important factors are listed below.
Consider the Industry
The first thing to do is to study the industry your business operates in. Different products have different demands and supplies in the market. You must know your industry well. For instance, if you are into the clothing industry, you need to stock products of different sizes to suit the latest fashion trends.
Know the Risk vs. Reward
When thinking about ordering additional inventory, you need to consider the risk and rewards. If it is likely to offer your rewards or profits, then it’s worth reordering. However, if there is a risk of loss, it is wise not to reorder.
In addition to these, consider the inventory costs and inventory turnover ratio. You can also leverage the cost-to-retail ratio formula.
Tips For Managing Your Inventory Effectively
Managing your inventory is important to meet the demands of customers on time. Here are some effective tips that can help.
Prioritize your inventory: Keep track of what products are selling well and reorder those items more frequently. For items that aren't selling as well, you can order less often or keep lower quantities on hand.
Audit your inventory regularly: This will help you spot any patterns or trends in how quickly your inventory is moving.
Analyze the performance of your supplier: If you're constantly running low on certain items, it may be time to find a new supplier who can better meet your needs.
Track sales: Knowing how much inventory you have on hand and how quickly it's selling can help you make informed decisions about reordering and stocking levels.
Invest in the right technology: There are many software options available that can help you keep track of your inventory levels, sales, and more. Find one that fits your needs and budget and put it to good use!
By following these tips, you can better manage your inventory and ensure that you have the products your customers need on hand when they need them.
Related: 5 Steps for Choosing the Ideal Warehouse Management Software
It can be tricky to know exactly how much inventory to keep on hand, but these tips will help you get started. Keep in mind that your business might require a different approach, so always consult with an expert if you’re unsure. And if you need help with fulfillment, Conveyr is here to support you. Contact us today for more information about our services and how we can help your business grow!
Recommended: 7 Types Of Inventory Risk And What They Mean For You