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Stored products decrease in quantities as orders are issued, and in response to these fluctuations, we find two key concepts:
- The maximum stock is determined by the storage capacity of the warehouse and supply policies.
- The minimum stock indicates when and where a new order needs to be made. This is the reorder point.
Both of these concepts are included in the minimum/maximum replenishment model, which is the most consolidated method of controlling stock between companies.
Inventory management is an important part of supply chain management.
The minimum-maximum model
With the minimum-maximum method, a point of supply is fixed, which, following the consumption of the goods in stock, allows the order to be fulfilled in order to maintain the right stock levels.
This is an easy-to-implement method, which can be easily automated using ERP and WMS systems.
This way, when an SKU or reference reaches the minimum stock levels, the system sends a notification or automatic supply order.
There are several methods and parameters we can use for establishing the minimum stock level, such as:
- Demand forecast
- Lead time, which is the delivery time utilized by the supplier.
- The cost or volume of the order.
The minimum-maximum stock method has some flaws:
Firstly, this model starts from a perspective focused on each SKU, without considering the overall status of the inventory or suppliers. For example, there might be a vendor that has a policy that provides for a minimum distributable charge across all products in their catalog. With the minimum-maximum stock approach, the order would be issued only once the “minimum spend” or “minimum order quantity” indicated by the supplier has been reached, which is not economically advantageous.
Secondly, it does not always take into account the product development cycle. Each code goes through a life cycle with different phases that influence demand (introduction, growth, maturity, and decline). Unless the minimum-maximum stock rule is under continuous manual review, continuously applying replenishment could mean accumulating expensive oversupply.
Benefits of minimum-maximum stock management
One of the consequences of applying a strict minimum-maximum escort policy is to accumulate more materials than is necessary.
Firstly, it decreases the capital held in stock by freeing up economic resources that can be invested in other aspects, increasing the liquidity of the company.
Secondly, storage costs related to stock conservation are reduced. In addition, the risks of obsolescence related to the resources in the warehouse are better controlled.
Lastly, you can free up storage space to expand your catalog, upgrade your picking area, or invest in purchasing the materials you really need.
How to optimize inventory to keep a minimum stock?
By reviewing and classifying stock stored according to their rotation, it is possible to unearth “forgotten” materials that can make inventory management inefficient. In this sense, warehouse management software allows you not only to perform cyclical and accurate inventory counts but also to always have a valuable history that will greatly facilitate inventory optimization activity. In addition, the management of this information will be of great help in prioritizing minimum inventory to the most important codes based on different logistical parameters: turnover, profitability margins, procurement costs, for example. In this way, the minimum stock of each reference is calculated from a global and not an individual point of view: individual materials are purchased on a single budget (they share the same investment).
2. Not just numbers: plan considering all the logistical factors
In some cases, the minimum-maximum model works in an invisible way, especially if it has been automated. However, we recommend that you plan your replenishment taking into account all the factors that affect logistics operations and not just the numerical amount of inventory. Otherwise, the warehouse may be overloaded upon receipt of the goods. If an order placed to the vendor is configured to happen automatically at the SKU level, the company will lose the benefits of load consolidation.
Having a WMS allows the warehouse to better handle unplanned inbound shipments while also managing the arrangement of goods on shelving.
3. Focus on a more efficient warehouse with lower operating costs
The main function of stocks is to provide the company with the ability to respond to product demand at the right time, in the appropriate form, and in the appropriate ways. Although there are strategies designed to optimize the amount of stock in stock – such as the “just in time” model – the storage of the goods remains necessary for the operation of the supply chain. Since maintaining the minimum stock is essential, operating costs must be reduced by reducing the time when goods remain stationary in stock.
A good approach is to work for warehouse efficiency by improving delivery times or lead times.
These can be divided into:
- Lead time of the real transport of goods from one place to another. Undoubtedly, the automation of warehouse processes such as load handling, for example, frees operators who can devote themselves to more complex and less repetitive tasks.
- Lead time of information, which is the time it takes to process orders, create picking lists, and establish a hierarchy of priorities. WMS is the ideal tool to reduce cycle times and to streamline warehouse operations.
The importance of controlling stock levels should be stressed as it serves to prevent the dreaded breakdown of stocks and the oversizing of safety stocks.
A few final words
The financial impact of stockpiling and the increasing variability of demand have forced many companies to change their stock management policy. This revealed the limits of the minimum-maximum model. Trying to adapt it to an increasingly complex reality involves integrating advanced software into logistics management, as well as basing strategic decisions on measurable data.
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