What is stock?

Stock is the total of all existing inventories of a company. In trade, this is the stock of goods; in production companies, it is the stock of raw materials and supplies, semi-finished and finished parts, as well as any merchandise that may be available.

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Inventory: Scope & Calculation

Stock is a central component in trading and production companies. It provides customers or production with the raw materials, goods or parts they need at all times and is therefore crucial for smooth processes.

Products that are located outside the company’s own premises can also count as inventory, provided that the transfer of risk has not yet taken place. This is particularly the case with floating, rolling and consigned goods. In terms of quantity, the stock is determined by stocktaking or the continuous notation of all receipts and issues.

The monetary valuation can be carried out according to various procedures. Often the quantity of the existing stock is multiplied by the moving average value of the goods. From the point of view of the balance sheet, the stock is an inventory asset or current asset.

The stock level (in terms of quantity) and the stock value form the basis for calculating important warehouse ratios, which we also discuss in more detail in this guide.

What are minimum stock, reorder level and maximum stock?

To ensure the optimal availability of goods, three parameters are important in warehousing: the minimum stock level, the reorder level and the maximum stock level. Each of these values must be calculated sensibly, which can be done using formulas. Errors in the determination, on the other hand, can lead to either unavailability of goods or excess stock. Many ERP systems determine the values automatically and regularly on the basis of predefined framework conditions. In the following, we take a closer look at the definition.

Minimum stock

The minimum stock, which is also called safety stock, reserve stock or iron stock, has the task of compensating for unforeseen fluctuations in requirements or replenishment. In this way, the aim is to maintain ongoing operations, even if the following circumstances occur:

The supplier does not deliver on the scheduled date

The delivered quality does not meet the specifications

Production does not manufacture the required products on time

There is an unusual increase in demand

Shortages occur

The selection of the correct minimum stock level is basically based on the replenishment time (order initiation to goods receipt) and the average daily consumption, but must be sector-specific and based on own experience. In practice, the following formulas are recommended for orientation:

As a general formula for minimum stock:

Example: You consume 10 pieces of a good per day, the replenishment period is 5 days. Your minimum stock should be 1/3 of the consumption during the replenishment period according to the formula.

Minimum stock= 50/3=16.66 pieces

Of course, parameters such as delivery delays or excess consumption can be included in the calculation as required.

Reorder level

If the reorder level is fallen short of, this leads to the triggering of a purchase order, which is why this is also referred to as a reorder point. It has the task of triggering an order for goods in time enough without having to attack the minimum stock level. This in turn means that the minimum and reorder point parameters must be optimally coordinated with each other. Important variables for calculation here are also the consumption values and the replenishment lead time. The formula is as follows:

Example: A trading company sells 3 bottles of a red wine per day. The replenishment lead time is 10 days, the safety stock is 25.

Reorder level= 3 x 10+25=55 bottles of red wine

It follows from this: As soon as the stock falls below 55 bottles, new goods are reordered. Ideally, this is done by an ERP system in the form of an order proposal or direct generation of an order.

Maximum stock level

The main purpose of maximum stock, also called maximum stock, is to prevent unnecessarily high inventories. Thus, on the one hand, the limitation makes sense with regard to capital commitment (especially with expensive goods), and on the other hand, it may be absolutely necessary due to the available storage volume (large, bulky parts). The minimum stock is included in the calculation of the maximum stock. The formula is:

Maximum stock=minimum stock+optimal order quantity.

From this it can be deduced that the maximum stock should theoretically be chosen on the basis of the cost-optimal order quantity. In practice, however, this is not always possible, as it may result in too much capital being tied up or the storage capacity being exceeded. An automated calculation of the maximum stock level is therefore not always effective. If you set the parameter manually, however, you have to keep an eye on it and regularly adjust it to the current consumption values.

How can the optimal stock level be determined?

The optimal stock level must be the primary objective of the disposition and pursues the following goals:

Smooth operational flow

Low storage costs (capital commitment)

Cost-optimised procurement

Thus, several requirements are initially in conflict with each other, which is why it is necessary to find the ideal middle ground. To calculate this, you must first determine the optimal order quantity. A mathematical, relatively complex solution for this is provided by the so-called Andler formula:

Example: The annual demand for a product is 50,000 pieces, the ordering costs are 20 euros. The purchase price per unit is 5 euros and the inventory cost rate is 20 (%).

The optimal order quantity of the product is therefore around 2828 pieces.

Now you can calculate the optimal stock level using the following formula:

Optimal stock level= minimum stock level+optimal order quantity.

Example: If we assume a minimum stock of 46 pieces and the optimal order quantity of 2828 pieces determined above, the optimal stock is 2874 pieces (2828 + 46). With this stock quantity, all costs are optimised.

Warehouse ratios – meaning and application in practice

In warehousing there are various key figures with which you can determine the efficiency, security of supply as well as the importance of articles in relation to their consumption or their capital commitment. The most important warehouse ratios are presented below.