Monitoring the maximum stock level or maximum volume of the stock is crucial for businesses as it plays a key role in defining a company's capacity to meet customers' demands. There are different ways a company manages stock like installing inventory management software that keeps a check on the right stock level. Keeping track of max stock level helps companies put a check on the number of items in their warehouse.
This helps business owners with their primary objective of meeting the demand for products and avoiding overstocking. In this blog, we are going to unfold key aspects associated with the max stock level, its formula, and factors that impact the same.
What Is the Maximum Stock Level?
The maximum stock level is also known as the maximum inventory level. It can be defined as the maximum amount of stock that a company can store in its warehouse without incurring any additional storage costs. This level is usually determined based on factors like demand, cost of holding inventory, storage capacity, and lead time i.e. time for order placement.
The goal of monitoring the maximum stock level is to ensure that the company has enough inventory to fulfill customer orders without overstocking.
Having an excess inventory can lead to a loss of resources and will also hinder cash flow. Thus, it becomes important to carefully monitor and keep a tab on the inventory level in the warehouse. Companies can use the max stock level calculation formula to determine the maximum inventory level for their organization. In the next section, let's understand the formula for the maximum stock level in detail.
Maximum Stock Level Calculation With Example
The maximum stock level helps a company keep some buffer stock to meet the sudden additional demand. So, with the help of maximum stock level calculation, you can figure out the right quantity of a particular item that is required to be maintained in the warehouse.
Determining the maximum stock level involves different factors like capital, product consumption rate, the storage capacity of the warehouse, economic order quantity, risk of deterioration, and others.
The four key aspects taken into account while calculating the maximum inventory level are:
- Reorder point - It is defined as the level at which the company needs to procure new products to eliminate the condition of stockout.
- Replenishment quantity - It is the number of items that need to be procured to replenish the inventory. This amount should not be too high or too low. Too much stock may lead to excessive capital tie-up, while a low amount may lead to insufficient safety stock.
- Minimum demand - It is defined as the minimum quantity of inventory that a business consumes in a given period.
- Lead time - It is the time elapsed from the time the stock order was placed with the supplier till the time the goods are received by the company.
Next, let's look at the maximum stock level formula.
The maximum inventory level calculation formula is:
Maximum stock level = Reorder point + Replenishment quantity - (Minimum demand x Lead time)
Let us understand with a maximum stock level example.
Let's assume you run a business, and it has calculated the minimum demand level to be around 10,000 items per week. In order to properly serve its customer, it needs to restock around 65,000 units every four weeks. Its goal is to ensure that the stock level remains above 45,000 (the reorder point).
Reorder point = 45,000 Replenishment quantity = 65,000 Lead time = 4 weeks Minimum demand = 10,000
Maximum stock level = 45,000 + 65,000 - (10,000 x 4) = 110,000 - 40,000 = 70,000
Factors Involved in the Maximum Stock Level
There are several factors that contribute to the maximum stock level for a particular product. It may vary from one organization to another, but the following segment highlights some of the common ones:
Average daily demand
It is the average quantity of a product that is sold. This is used to calculate the quantity of inventory that is required during the lead time.
Lead time
It is the time taken to replenish the stock once it is over or it reaches a point where the company needs to order it to maintain the stock level.
Safety stock
It is also known as buffer stock. This is the amount or the number of items that should be there in the inventory to meet the growing demand in case any supply chain issue arises. This ensures that the company is never out of stock.
Storage capacity
It is defined as the maximum capacity of the storage facility. It ensures that the business does not exceed the storage capacity and there are no additional costs incurred to manage this inventory level.
Cost of holding inventory
Sometimes companies need to hold extra inventory. For this, the company needs to spend extra on insurance and a warehouse. If the cost of carrying inventory is high, the company will reduce its maximum stock level.
Economic order quantity
This is the optimal order quantity that reduces the total cost of ordering and holding inventory in the business. It is used to determine the reorder point and order quantity for the product.
By counting in all these factors, companies can determine the maximum sock level. Thus, helping them optimize the inventory management process and reduce the cost while ensuring efficiency and meeting customer demand.
Maximum Stock Level With Right Software
There are many software programs available in the market that help in managing the inventory, and real-time tracking of inventory levels through automation. Inventory management software is equipped with all the features that help you optimize the supply chain, thereby ensuring the meeting of the demands of the customers without the condition of stock out. Therefore, it helps to reap all the advantages of maximum stock level.
With the help of the right kind of software, businesses can:
- Increase efficiency by reducing human errors.
- Know real-time inventory figures and detailed insights.
- Help minimize overstocking and optimize cash flow.
- Reduce the risks associated with overstocking and stockouts.
- Improve productivity by automating manual tasks.
- Make the entire supply chain system seamless.
- Overcome stock management bottlenecks.
Overall, automated software like TranZact simplifies and streamlines the supply chain management process and helps the company keep a tab on its inventory levels.
FAQs on Maximum Stock Level
1. What is the purpose of maximum stock level?
The purpose of the maximum stock level (MSL) is to always have the right volume of items in the warehouse. Keeping a check of MSL also helps to optimize the inventory management system and ensure that there are minimal inventory costs and risks involved.
2. What are some risks associated with having excessive inventory levels?
When a company has an excessive inventory level in its warehouse, it needs to spend extra money on insurance, storage of inventory, and labor cost.
3. What is the minimum stock level?
It is the minimum amount of inventory or stock that a company must have such that it never runs out of the item in case the demand arises.
