Many business owners consider this the true “million dollar question."
No company wants to hold too much inventory for too long. But on the flip side, no company wants to have too little inventory, creating the possibility of a stock-out.
Getting it right requires consideration of both cycle and safety stock.
Ask yourself the following question: how much additional inventory do I need to prevent lost sales and stock-outs if and when an unexpected order comes through? The good news for you is that you no longer have to guess. There are algorithms within sophisticated computer programs to accurately provide these answers.
What is an Economic Order Quantity formula?
A classic Economic Order Quantity (EOQ) formula accounts for volume of demand, frequency of orders placed, product cost, holding cost and ordering costs. Collectively, this data will confirm the optimal level of available product needed to fill customer orders at any given time.
A safety stock formula attempts to account for variance in the supply chain, whether it be lead time or demand gaps. When you order products or materials from places far away (especially overseas), the estimated time of arrival for those products could be a month or more. The longer the timeframe, the harder it is to plan, and consequently, more safety stock is needed to assure that you will ALWAYS have product available to meet your customers’ needs.
Supply Chain Guru
Fortunately, Nexterus clients have access to Supply Chain Guru, a technology developed by Llamasoft. Within this program, “Inventory Guru” analyzes historical trends specific to an organization’s inventory needs and then calculates a customized demand curve, with no broad estimations or assumptions. It truly does provide reliable answers, at a very affordable rate, even to a “million dollar question.”
