How To Decide on your Lowest Inventory Levels based on your Inventory Lead Time
Fact is that businesses should store all the inventory, which might with time include defective or out of date products. Because of the total inventory costs included in managing and holding the inventory, an organization would like to keep the lowest number of product in stock and still be in a position to satisfy customer orders at any time.
The lowest inventory levels an organization could afford to keep would rely on a number of elements, such as time among putting orders from suppliers and getting the orders delivered to the warehouse. This is generally called and referred to as lead time. This is very important operational metrics and inventory key performance indicator that you should measure and track at all times. By tracking this inventory metric you will be able to improve your inventory management operations.
Determine maximum lead time. You can do that by using the delivery and order dates of your prior orders that you set with your suppliers. The lowest level of inventory is the same as maximum lead time measured in days or weeks, multiplied by maximum utilization of daily or weekly inventory.
Whether you should use days or weeks or maybe months it all depends on your business model. There is no one way to do it. You should use whatever metrics help you make proper decisions for your company.
From your prior historic inventory data, you can set up the maximum time that it will take for suppliers to deliver your order. For instance, let’s say that your suppliers typically will take few weeks to deliver your orders however at times it will take two additional weeks. In such a case your maximum lead time will increase from typical one or two weeks to 4 weeks.
This is a total approach to inventory management. You can break down your lead time by products or categories because some products might need longer lead time. This will help you become more efficient.
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