Businesses that don’t operate a sales order process, such as shops and rental companies, must hold a ‘safety stock’ to meet unpredicted sales and exchanges.
A business that successfully manages its safety stock should never lose a sale because they don’t have an item. Having a lot of ‘out of stock’ products appears unreliable to potential customers.
So without the foresight of a sales pipeline, how is a minimum stock threshold determined?
Supplier Delivery Time
The length of time it takes for a product to reach your business from the supplier is the most important factor to consider. The safety stock must be adequate to meet sales during this time. It is not sufficient to allow stock to run out before re-ordering.
The next step in establishing a minimum stock threshold is establishing customers’ average purchases during the supplier delivery time.
There is a challenge to hold enough stock to cover suppliers’ delivery times that is sufficient enough to meet customers’ demand but not too great that it affects gross profit because of high carrying costs.
Let’s say that a supplier has a delivery time of 8 working days. The business knows that on average, it sells 220 units of their product per month. If there are 22 working days in the month, then the safety stock should be at least:
220 units / 22 days = 10 units per day X 8 days delivery time = 80 units safety stock
Determine Reorder Points
It’s unlikely that the purchasing department will place an immediate order when the minimum stock threshold alert appears, especially if the process is not automated. They may have a specific day of the week for this task or require time to source quotations. Therefore, the reorder level needs to be set higher than the safety stock level, depending on the individual business’ procedures.
Setting stock re-order levels is just one of the steps businesses can take to achieve savings through purchasing efficiencies.