Calculating dynamic optimal levels
On hand stock over time
The saw-tooth diagram is a quantity-versus-time graphical representation of inventory being received, used up or sold, and reordered. Essentially, the saw-tooth represents the units of on hand stock over time.
The following repeating sequence of events will result in the above diagram, over time:
- A: as time passes, we sell/use stock and the units on hand reduces
- B: the quantity in units is at its lowest point when the next delivery arrives
- C: once stock is receipted, the units on hand increase to its highest point
The saw-tooth also illustrates the various components of inventory.
- Safety stock (SS): the quantity of stock planned to be in inventory to protect against fluctuations in demand and/or supply (the two major inventory risks in your business). Safety stock can be seen as an insurance policy against running out of stock – the bigger the risks, the more expensive the premiums (or the more safety stock required!).
- Cycle stock (RC): the replenishment cycle defines how often each item is ordered.
- Lead time (LT): the number of days from when the order is placed until the inventory is receipted into stock.
Computing dynamic levels by converting days to units
In order to decide WHEN to order and HOW MUCH to order, the “days” need to be converted to units so they can be tested against your available on hand stock.
Testing these dynamic levels against on hand stock
As you move through time, the app continually tests whether you need to place an order today by comparing available on hand stock with the reorder point.
As soon as your available on hand inventory hits the “reorder point” (A), the app triggers an order for delivery in a lead time from now (B). The recommended order quantity (C) is the order up to less available on hand stock.
Over the lead time you will continue to sell, and in a perfect world your order will arrive as your available on hand stock equals your safety stock level (B).