Min Max Inventory Formula: Definitive Guide for 2023
In this article, we explain the min max inventory formula in detail and how you can apply it. We will also walk you through our simple real-world examples to illustrate how it works. Read on to learn more.
What Is the Min Max Inventory Formula?
The min/max inventory formula is a method used in inventory management to determine the optimal stock levels. It revolves around two key inventory levels: the minimum (min) and the maximum (max) stock levels:
Minimum Level (Min): The lowest stock level at which a new order should be placed to replenish the inventory.
Maximum Level (Max): The stock level that shouldn't be exceeded to avoid overstocking.
By monitoring inventory levels and ensuring they remain within these bounds, businesses can balance the risk of stockouts with the cost of holding excess inventory.
Min/Max Formula for Inventory and Calculation
The min/max inventory system primarily operates around the concept of setting a minimum and a maximum inventory level.
To set the minimum and maximum stock levels, you can use the following formulas:
1. Minimum Level (Min) = Reorder Point - (Normal Consumption × Normal Reorder Period)
Reorder Point = Safety Stock + (Average Daily Demand × Lead Time)
Safety Stock = (Maximum Daily Demand × Maximum Lead Time) - (Average Daily Demand × Average Lead Time)
Normal Consumption = Average amount of stock used during a given period (e.g., daily, weekly).
Normal Reorder Period = Average time it takes from when an order is placed until it's received.
2. Maximum Level (Max) = Reorder Point + Reorder Quantity - (Minimum Consumption × Minimum Reorder Period)
Reorder Quantity = The typical amount of stock ordered when replenishing inventory.
Minimum Consumption = The least amount of stock used during a given period (e.g., daily, weekly).
Minimum Reorder Period = The shortest time it takes from when an order is placed until it's received.
Sunshine Electronics is a renowned supplier of electronic components. They sought to optimize their inventory levels to meet customer demand while minimizing holding costs.
Sunshine Electronics has observed that the demand for a specific resistor varies. The average daily demand is 500 units, but on peak days it can surge to 1,000 units. The lead time to get these resistors from their supplier averages 7 days, but it has taken as long as 10 days during certain peak times.
They typically reorder 3,500 units of the resistor every time they place an order. Based on historical data, Sunshine knows that on days with minimal demand, they only sell around 300 units.
Given these details, let's apply the min/max inventory formulas:
= (Maximum Daily Demand × Maximum Lead Time) - (Average Daily Demand × Average Lead Time)
= (1,000 units × 10 days) - (500 units × 7 days)
= 10,000 units - 3,500 units
= 6,500 units
= Safety Stock + (Average Daily Demand × Lead Time)
= 6,500 units + (500 units/day × 7 days)
= 6,500 units + 3,500 units
= 10,000 units
Minimum Level (Min)
= Reorder Point - (Normal Consumption × Normal Reorder Period)
Assuming Normal Reorder Period is 7 days (average lead time),
= 10,000 units + 3,500 units - (300 units/day × 7 days)
= 13,500 units - 2,100 units
= 11,400 units
Based on the min/max formula for inventory, they should aim to reorder the specific resistor when stock levels dip to around 6,500 units and avoid letting stock exceed roughly 11,400 units to maintain optimal inventory levels.
Azure Couture is a prominent fashion brand known for its trendy clothing. They decided to refine their inventory levels for a particular summer dress to cater to their fashion-forward clientele without the burden of excessive holding costs.
Azure Couture observed fluctuating demand for a specific summer dress. Typically, they sell 200 dresses daily, but sales can spike to 500 on peak summer or promotional days. The average lead time for dress deliveries is 5 days, extending to 8 days during peak production periods.
The brand typically reorders 1,200 dresses every time they place an order with their manufacturer. Historical data indicates that on slower sales days, especially during off-peak seasons, they only sell around 100 dresses.
Given these details, let's apply the min/max formulas:
Average Daily Sales: 200 dresses
Maximum Daily Sales: 500 dresses
Lead Time: 5 days
Maximum Lead Time: 8 days
Reorder Quantity: 1,200 dresses
Minimum Sales: 100 dresses
= (Maximum Daily Sales × Maximum Lead Time) - (Average Daily Sales × Average Lead Time)
= (500 dresses × 8 days) - (200 dresses × 5 days)
= 4,000 dresses - 1,000 dresses
= 3,000 dresses
= Safety Stock + (Average Daily Sales × Lead Time)
= 3,000 dresses + (200 dresses/day × 5 days)
= 3,000 dresses + 1,000 dresses
= 4,000 dresses
Minimum Level (Min)
= Reorder Point - (Normal Sales × Normal Reorder Period)
Assuming Normal Reorder Period is 5 days (average lead time),
For Azure Couture, the min/max inventory formula suggests they should reorder the summer dress when stock levels approach approximately 3,000 dresses and ensure inventory doesn't exceed around 4,700 dresses to maintain the right balance between demand and supply.
We hope this article has given you a better understanding of the min max inventory formula and how you can use it to effectively manage your inventory.