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iomnet
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System Administrator
Total Posts: 87
Joined: 12 Feb 07
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Can anybody point me to where I can find the full formula for working out min max stock levels and its definitions?
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iomnet
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System Administrator
Total Posts: 87
Joined: 12 Feb 07
Member #1
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Max stock is Delivery Quantity + Safety stock By "Min stock" I presume the member means "Review Level" - i.e. reorder trigger level This is given by "Usage in lead time + Safety stock"
Safety Stock is given by "Customer service factor x MAD x Square root (supply lead time)"
For an explanation of Safety stock you could get in touch or read in my book "Best Practice in Inventory Management (2nd Edition) which may be in the IOM Library.
However you do need another trigger level as well in order to stop running out of stock
More help available if required
Tony W
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iomnet
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System Administrator
Total Posts: 87
Joined: 12 Feb 07
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If anybody tells you that there is a formula for minimum or maximum stock then treat them with suspicion - they are academics trying to impose science. They will use all sorts of statistical techniques to say that we need to cover 3 standard deviations in supplier delivery times and that these are known to conform to Normal distribution while the distribution of demand variations is known to be of the Poisson variety.
The same people will explain how to calculate economic order quantities and use calculus to show that the two costs (ordering and stock-holding) are minimised in total when the order quantity is the square root of (2 x annual demand x order cost divided by (cost of money x unit cost of item)).
Remember that these people are the same people who invented Operational Research in World War 2 and used these same techniques to decide between large convoys from the US (high chance of detection but the faster ships will escape) and small (lower chance of detection but convoys detected will be wiped out). They opted for large and all was well until the ships arrived at Liverpool. Of course they couldn't all get into harbour at the same time and the U-Boats had a field day with sitting targets a couple of miles off shore.
Minimum stocks? What affects this? Do you have a forecast of demand? Is it reliable? Do you sell or make from stock or do you offer a market lead time that allows you to buy or make. What is the supply lead time of materials? (Does this matter? If you are getting weekly deliveries of machined components from China why does the 13-week lead time have any bearing?)
Maximum stocks - why does anybody talk about min-max? Surely maximum is minimum plus order quantity so it's a consequence of the other things you need to be thinking about rather than a subject in its own right?
As for minimum - use judgement. Yes, think about variety of demand and vulnerability of the item to quality problems. Don't forget shelf life, or how quickly a shortage can be easily made up. Think about how well you can forecast potential requirements and whether you need to meet all demands with immediate response. Obviously think about cost, and size . . .
Most of all don't be fooled by anybody who claims to have a magic box that will decide the answers for you. If you do that you will be following the method of those poor sailors who were led by the academics into following the theoretical without considering the practical.
If I sound cynical, then maybe I am - but cynicism is very often justified in this world of hype and spin.
Ian H
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iomnet
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System Administrator
Total Posts: 87
Joined: 12 Feb 07
Member #1
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Here is a bit of background on Min/MAx & a useful website
http://www.glossaryofmanufacturing.com/o.html
Order Point System (= Min/Max System): A means of replenishing stock. A new replenishment of stock is requested from the supplier (or other replenishment
source) when the company's current stock level falls to its calculated order point. The order point is calculated from three factors: (1) the forecast offtake of stock, expressed in units per time period (*); (2) the replenishment leadtime of a new delivery (*); and (3) the safety stock provided to cover forecast error. The order point is then calculated as the "leadtime demand", plus safety stock ... ie the offtake demand from stock forecast to occur during the replenishment leadtime, plus safety stock. Note that if the replenishment lot size is R, the average stock level is (R/2 + S). The order point system is also called the Min / Max System because the stock level swings between a minimum (the order point) and a maximum (R + S). If this is the meaning, however, the term is clearly wrong, since the minimum stock is S - the stock level S is reached after the new replenishment has been sent for and before it arrives.
(* If the forecast is D units / month and the leadtime has been recorded in days, D must be converted to a forecast of so-many units per day by dividing the monthly forecast by the number of days in the month).
Use of the order point system is valid only if the fall in stock level of the product concerned is gradual and even - as it may be, for example, for fuel or common consumables. It cannot be successfully applied in a materials planning environment, since falls in stock levels are lumpy due to lot sizing. It is also very difficult to see how it could be used in a practical way if multi-period sales forecasts were to be taken account of.
Should be able to create a spreadsheet formula to utilise this.
Regards,
David M
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Peter Phillips
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Forum Member
Total Posts: 1
Joined: 17 Dec 07
Member #37
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Quote: iomnet, Friday, 29 Jun 2007 20:26Can anybody point me to where I can find the full formula for working out min max stock levels and its definitions? I have been using a re-order point algorithm for many years for my purchase to stock building materials wholesale business and have found it to be astonishingly accurate. I would be happy to give you some examples. I would just need the following: 1) SKU description and location. 2) Service level requirement 3) ETA of any incoming containers. 4) Number of units in stock. 5) All lead time data in months (show the full spread of lead times) 6) Your sales forecast (units per month) over the next lead time period. 7) Landed cost per unit at the warehouse. 8) Monthly storage cost per unit at the warehouse. 9) Cost per order event. Cheers, Peter Phillips.
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Formula & definition for min max stock levels?
29 Jun 2007, 20:26