Stock Control Balances Efficiency and Preparedness
- Can you consider for a moment how much of a wasted opportunity it would be if one week, demand for your latest product surges unexpectedly, but your supplier is delayed?
- Without the right stock management strategy, you risk disappointing customers and losing sales.
This is why it's so important to have effective inventory management.
Key Terms in Stock Management
- To maintain a well-functioning inventory system, businesses must understand four key elements:
- Lead Time: The time between placing an order and receiving stock.
- Buffer Stock: Extra inventory kept as a safety net.
- Reorder Level: The point at which new stock must be ordered.
- Reorder Quantity: The amount of stock replenished in each order.
Failing to manage these factors effectively can lead to stockouts, damaging customer satisfaction and revenue.
Lead Time: How Long Until Stock Arrives?
Lead time
Lead time is the delay between placing an order and receiving goods.
Why Lead Time Matters
- Prevents Stockouts: Knowing your lead time helps you order stock before it runs out.
- Improves Planning: Accurate lead time data enables better scheduling of production and sales activities.
- Reduces Costs: Shorter lead times can minimize the need for holding large inventories, saving on storage costs.
In 2024, Apple diversified its suppliers to reduce lead times for iPhone chips, avoiding shortages caused by semiconductor supply chain disruptions.
TipAlways monitor lead times closely, as they can vary due to factors like supplier reliability or shipping delays.
Buffer Stock: A Safety Net for Uncertainty
Buffer stock
Buffer stock is the minimum inventory level maintained to prevent stockouts during unexpected demand spikes or supply delays.
Why Hold Buffer Stock?
- Ensures Continuity: Keeps operations running smoothly even if there are disruptions.
- Enhances Customer Satisfaction: Prevents lost sales by ensuring products are always available.
- Mitigates Risks: Acts as a cushion against unforeseen events like supplier delays or sudden demand increases.
A clothing retailer might keep extra winter coats in stock to handle unexpected cold snaps.
Factors Influencing Buffer Stock Levels
- Demand Variability: Higher variability requires larger buffer stocks.
- Supplier Reliability: Unreliable suppliers necessitate higher buffer levels.
- Storage Costs: High storage costs may limit the amount of buffer stock a business can afford.
Industries with perishable goods (e.g., supermarkets) need lower buffer stock than technology companies that sell non-perishable products.
Reorder Level: Knowing When to Restock
Reorder level
The reorder level is the inventory level at which a new order must be placed to replenish stock before it runs out.
How to Calculate Reorder Level
- The reorder level depends on two factors:
- Lead Time: How long it takes for new stock to arrive.
