Set Minimum and Maximum Stock Quantities Properly (Part 1)

By Matt and Jon Schreibfeder

Last week a client asked a question concerning an item where a buyer had established a minimum stock

level of 10 pieces and a maximum stock level of sixty pieces. The item is typically sold ten pieces at one

time so minimum quantity of 10 pieces made sense. That is, they wanted to reorder the product when

they had no less than 10 pieces on the shelf. But we questioned the maximum quantity of sixty. How

did they come up with that number?

The buyer said, “the vendor sells us the product in a box of 50 pieces. When we get down to the

minimum of 10 pieces we want to order one box.” *This buyer’s simple logic will probably lead to a*** significant over stocking problem.** To best explain why, let’s continue the interview with the buyer.

We asked what quantity the buyer would use for the maximum stock level, if he could buy any amount

of the product. He responded, “30 pieces, enough to fill three typical customer order quantities”. Using

this example, I explained **how his company’s common practice of rounding maximum quantities to the****next multiple of the vendor package quantity will bloat his inventory.**

When the net available quantity (On Hand – Committed on Outgoing Orders + Quantities Currently on

Replenishment Orders) of a product in his warehouse reaches or falls below the minimum stock

quantity, *his computer will order enough of the product to bring the net available quantity up to the*** maximum stock quantity.** This needed quantity will be rounded by his computer system, if necessary,

to the next multiple of the vendor package quantity.

“That’s why we set the minimum and maximum quantities to 10 and 60 for this item!” the buyer

interrupted.

“But”, I continued, “what if the net available quantity fell to five pieces before you issued a

replenishment order? The system would calculate the difference between the maximum quantity and

the net available quantity and want to order 55 pieces. (60 piece maximum – 5 piece net available

quantity = 55 pieces). The ERP system’s suggested replenishment program will then round this quantity

to the next multiple of the vendor package quantity and suggest an order of two boxes or 100 pieces.*Remember that you wanted a maximum of 30 pieces; instead you will land up with over 100 pieces in**stock*.”

*The suggested purchase order program of most computer systems rounds purchase quantities to the**next vendor package. Had the buyer set the maximum to 30 pieces his system would only order one**package of 50 pieces when the product’s net available quantity dropped below the minimum stock level**to five pieces. His company would have been slightly overstocked (i.e., 55 pieces) rather than grossly**overstocked (i.e., 105 pieces).*

**Always set your maximum quantities (as well as your other replenishment parameters) to what you****want them to be regardless of how much you have to order. Let your system round needed****quantities of each product to the next multiple of the vendor package during the replenishment****process.**

Next month, we will discuss another common problem in effectively setting replenishment parameters.

In the meantime, please let us know if you have any inventory-related questions.