Stocks are money, money is blocked. Therefore, some of the most important tasks in both production and distribution are to reduce stock levels and at the same time avoid out-of-stock situations. A fine line and a fairly difficult balance to maintain if there is no continuous tracking and optimization process implemented.
How to properly calculate the stock levels?
What are the effects of wrong dimensioning? Either over stock or out-of-stock. Whatever it is, it's not ok.
- The out-of-stock situation creates a delay in the delivery or the production, a breach of the agreed delivery terms and consequently financial loss.
- An overstock situation means that you have blocked amounts of money
For a correct calculation of stock levels there are many departments responsible, from the planning, procurement and logistics departments, to the management. The dimensioning of the quantity-value stock levels is done by calculating the average stock over the last 6 months compared to the average sales for the same period, taking into account any planned increases plus a percentage representing the stock.
If the average stock is much higher than the sales average, it means that there is too much money blocked, and if the value is lower, it means that levels need to be adjusted to avoid out-of-stock situations.
What are the effects of correct inventory sizing?
Proper inventory sizing helps you increase efficiency by minimizing interruptions in production or delivering orders to customers and, implicitly, financial losses. The effects of overstocking or out-of-stock are not just immediate, but there is a real chain that spreads.
In production, the lack of stock of raw material produces effects in the production stream that is delayed. In production, the cost of any delay is enormous: both machinery and production equipment and workers are staying. And the effort to put another order in production instead of the one for which the raw material is missing also means an additional cost. The result is seen in the final cost of the product, which will increase, thus reducing the profit rate. Not to mention the extra transport costs and customer penalties for any hour or day of delay.
Production process interruptions and delivery delays can be anticipated and avoided using software solutions implemented and used correctly. Automating procurement processes, tracking stocks accurately using barcodes, and automating the real-time inventory process are the elements that lead to better planning and execution of orders.
Implementing a resources management software helps you calculate and plan your stocks more efficiently. For more than 23 years, SocrateERP has been implemented by medium and large companies in Romania that are active in production and distribution and have managed to optimize their inventories, costs, production process and delivery over the years.
With the support of SocrateERP, Oil Terminal, one of Europe's largest oversized oil terminals, controls and optimizes inventory and repair operations and maintenance of machinery, eliminating dead time as a result of real-time knowledge of supply needs, such as and the work or project for which a supply order has been generated.
Tino, an important footwear brand for children, is another example of a company that managed to reduce its inventory by almost 20% and shorten its ordering time by over 15% by implementing the SocrateERP solution.
Cavilas Construct, a distributor of building materials, has optimized its procurement and inventory planning and tracking with SocrateERP. Find more details about their experience in the Cavilas case study or download other case studies of our distribution customers.