Inventory Management

Stock Levels

The Min/Max inventory ordering is an inventory replenishment method. The “Min” value represents a stock level that triggers a reorder and the “Max” value represents a new targeted stock level following the reorder. The difference between the Max and the Min is frequently interpreted as the EQQ (Economic order quantity – the purchase order quantity for replenishment that minimizes total inventory costs).

The reorder point is classically viewed as the sum of the lead demand plus the safety stock. The calculation of an optimized reorder point typically involves the lead time, service level, and the demand forecast.

Safety stock indicates how much inventory need to be kept beyond the expected demand in order to achieve a given service level target. The extra stock acts as a “safety” buffer – that protect the company against expected future fluctuations. The safety stock formula depends on both the expected future demand and the expected future lead time.

reorder point = lead time demand + safety stock

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