In this article, we explain what the min max inventory method is along with its advantages and limitations. We also provide a simple 6-step framework to help you calculate your min/max inventory levels, with real-world examples. Read on to learn more.
The min/max inventory method involves setting a minimum and maximum inventory level, with the goal of reordering stock once it hits the minimum threshold to keep it within this range.
Example: Bloom and Petal Florists aim to have a steady inventory of their best-selling red roses between 50 (min) and 250 (max) bouquets. When the rose bouquet count drops to 50, they place a fresh order to ensure their stocks return to the 250-bouquet limit.
Incorporating the min-max system can offer various benefits to businesses. We list some of these advantages below:
Inventory Optimization: Helps in maintaining an optimal inventory level, preventing stockouts and overstocks.
Cost Efficiency: Reduces holding costs by not having excessive stock and minimizes urgent procurement expenses.
Simplicity: The method is straightforward and easy to implement.
Flexibility: Allows adjustments based on changes in demand or supply conditions.
Enhanced Customer Service: Ensures product availability, leading to consistent service levels.
While effective, the min-max method isn't without its drawbacks, which may include:
Vulnerability to Demand Fluctuations: It doesn't adapt well to unexpected spikes or drops in demand.
Inventory Level Rigidity: A strict min-max range might lead to missed sales or overstocking in some scenarios.
Frequent Reordering: Might cause frequent orders if demand is consistently near the maximum level.
Risk of Stockouts: If replenishment is delayed, there's a risk of stockout between reaching the min level and restocking.
Dependency on Accurate Forecasts: Inaccurate demand forecasts can lead to inefficiencies in the system.
Safety stock is the amount of inventory you maintain as a buffer against uncertainties like sudden demand surges or supply delays.
How to calculate:
Safety Stock = (Maximum Daily Usage - Average Daily Usage) x Lead Time
Note: There are other advanced methods to calculate safety stock based on desired service levels and variability in demand and lead time.
Example: Classic Reads Bookstore observes that their Maximum Daily Usage of a bestseller is 100 copies, while the Average Daily Usage is 60 copies. With a Lead Time of 5 days to get more stock, their Safety Stock would be (100 - 60) x 5 = 200 copies.
The reorder point is the inventory level at which you should place a new order to replenish stock before it runs out.
How to calculate:
Reorder Point = (Average Daily Usage x Lead Time) + Safety Stock
Example: Freshly Brewed Coffee Shop uses 20 bags of coffee beans on average daily and has a Lead Time of 10 days for new stock. Adding their Safety Stock of 50 bags, their Reorder Point is (20 x 10) + 50 = 250 bags.
This is the amount of inventory you reorder when stock reaches the reorder point.
How to calculate: There are several methods, but a common one is the Economic Order Quantity (EOQ) formula:
EOQ = Square root of [(2 x Demand x Ordering Cost) / Holding Cost]
Example: Skin Glow Cosmetics has an annual demand for their foundation of 12,000 units. With an Ordering Cost of $20 and a Holding Cost of $1 per unit per year, their EOQ would be the square root of [(2 x 12,000 x 20) / 1] ≈ 490 units.
Formula: Min Inventory Level = Safety Stock
Example: Sunshine Grocery keeps a Safety Stock of 500 cartons of milk. Thus, their Min Inventory Level for milk is 500 cartons.
Formula: Max Inventory Level = (Reorder Point + Reorder Quantity) - Safety Stock
Example: Bike Mania Store has a Reorder Point of 50 bicycles and reorders 150 bicycles at once. If their Safety Stock is 20 bicycles, the Max Inventory Level is (50 + 150) - 20 = 180 bicycles.
As your business evolves, factors like average daily usage, lead time, and demand variability may change. Regularly review and adjust your calculations to ensure optimal stock levels.
Example: After a marketing campaign, Tech Haven Electronics noticed an increase in their Average Daily Usage of a specific gadget. They recalculated their numbers to adjust inventory levels, ensuring they continue to meet customer demands efficiently.
Sweet Delights Bakery wants to determine the min-max inventory levels for its best-selling blueberry muffins. Here's how they applied our 6-step framework:
Maximum Daily Usage: 300 muffins
Average Daily Usage: 200 muffins
Lead Time (time taken to replenish stock): 3 days
Safety Stock = (300 - 200) x 3 = 300 muffins
Reorder Point = (200 x 3) + 300 = 900 muffins
Demand (yearly): 60,000 muffins
Ordering Cost (cost per order): $30
Holding Cost (cost to hold one muffin for a year): $0.05
EOQ = Square root of [(2 x 60,000 x 30) / 0.05] ≈ 3464 muffins
Min Inventory Level = 300 muffins
Max Inventory Level = (900 + 3464) - 300 = 4064 muffins
After the summer season, Sweet Delights Bakery noticed a surge in muffin sales, likely due to increased tourism. They will re-evaluate their numbers every quarter to ensure their inventory calculations remain aligned with the actual sales trend.
Sweet Delights Bakery should aim to keep an inventory of its blueberry muffins between 300 (min) and 4064 (max) units. Whenever their stock drops to 900 muffins, they should place an order for 3464 muffins.
We hope this article has given you a better understanding of how the min max inventory method works and how to calculate your min/max inventory levels.
If you enjoyed this article, you might also like our article on inventory change or our article on inventory maintenance.
