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Determine the Optimum Inventory Level for your Business

Cotents from Dialog Axiata Sri Lanka


How to Determine the Optimum Inventory Level for your Business.

This is a vital question which any entrepreneur should ask himself. Determining optimum Level of Inventory is the first part of inventory control and management system. The following factors must be considered in order to find the optimum level of inventory.

  1. How much Capital is available to purchase the stock?
  2. How much in the existing consumer demand in the marketplace?
  3. What kind of consumer demand does exist in the marketplace?
  4. How much stock have you sold in the past?
  5. What are the industry averages for your type of business?
  6. What and how much is your inventory carrying costs and how do they increase as the inventory level increases?
  7. How much storage space is available?

The term inventory includes retail / wholesale merchandise or stock, raw materials, work in progress, finished goods, and supplies that physically become a part of the item intended to sale.

How much Capital is available to purchase the stock?

  • In determining how much inventory to hold, it is very important to consider how much money you have or can access to, as well as the effect of any financing charges on your cash flow. 
  • The prime objective of every inventory control and management system is to keep the financial investment in inventories just sufficient to supply the business.
  • It is wiser to set up a special reserve fund to meet sudden high demand for a particular product, rather than to fully invest in all the inventories and bear the full brunt of high monthly interest payments.

 How much is the existing consumer demand in the marketplace?

  • The existing consumer demand for the type of products you manufacture  and the resulting sales generated, should be predicted.
  • These predictions must be very accurate as much as possible.
  • Holding inventory levels at less than what is needed to support sales will cost your firm business, while holding more inventory than present demand will generate excessive inventory holding cost.

What kind of consumer demand does exist in the marketplace?

  • It is very important to predict and closely monitor the demand for key products / items
  • Displaying older inventory prominently and monitoring its turnover daily, can help prevent losses due to obsolete inventory.
  • In order to prepare for potential sales increases, it may be prudent to hold some level of stock which is known as safety stock.
  • The amount of safety stock can be determined by comparing cost of maintaining this additional inventory against potential sales losses.   

How much stock have you sold in the past?

  • In determining how much inventory to hold, you may take into account historical sales patterns and past experiences with certain products of your products.
  • This information may help to identify the more frequently selling items known as fast moving items and as well as the slow moving items in your stock for a certain period.

What and how much is your inventory carrying costs and how do they increase as the inventory level increases?

  • It is required to factor in the numerous costs associated with keeping inventory on your premises; these costs are known as inventory holding costs including costs of ordering, financing, receiving, storing, handling, insurance, keeping stock control records, and obsolescence costs, etc.
  • The above inventory holding costs obviously increase as inventory level arises.

How much storage space is available?

  • In determining how much inventory to hold, whether you are in retail, wholesale or manufacturing business, you should factor in how much available space you actually have for storing or displaying goods.

Do not buy more than you can afford or you may have future cash flow problems.

Remember that large inventories consume cash, increase the investment in the business and can bankrupt the business if not properly controlled. It is thus very important to keep the financial investment in inventories just sufficient to supply the business.

Business Development Centre.

bdclead@bellmail.lk

Hotline- 011 7220980

© Dialog Axiata PLC - Sri Lanka

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Jewels Airport Transfers, West Drayton, United Kingdom  |  January 21, 2015
Fabulous Post ! Really very informative content for the Business Planners!
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chinthaka prasanne  |  February 25, 2013