The tradeoff: three costs, together as low as possible
Optimal inventory management is a tradeoff. Stockouts cost money: missed margin, customers who leave, time that goes into solving problems. Holding inventory also costs money: capital tied up, space in your warehouse, and with long shelf time spoilage or technological obsolescence. More inventory lowers your stockout costs and raises your holding costs; somewhere in between lies an optimum. Finding that optimum is the third cost: computing the right stock levels takes time, item by item, and again each time demand or lead times change. Without specialised software the result is moreover an approximation, and you sit beside the minimum without knowing it. Good inventory management minimises the sum of the three: holding costs, stockout costs and the cost of the calculation itself.
- Holding costs
- Stockout costs
- Calculation costs
Proportions are illustrative.
Do you need calculation software?
Not every company needs calculation software. Whoever manages a handful of items works out the right stock levels easily enough, or can go on gut feel. Much of it already goes well enough on experience. The calculation cost stays small and you find the balance without help.
At some point that changes. The point depends on your number of items and locations, how hard demand and lead times move, and how much time your planners already spend today on calculating and adjusting. From our project experience, calculation software can deliver value fairly quickly, roughly from an inventory value of €500,000 provided there are enough SKUs. But that differs strongly per company. That is why we prefer to work it out for your situation. It starts with a short conversation, so we understand your business.
Curious whether software is worth it for you?
A short conversation, then an objective calculation for your situation.