Stock that earns its place.
Stock turns, days on hand and the yearly cost of carrying stock, with the safety stock and reorder point for one item.
How it is worked outHow the stock is worked out.
Turns and days on hand describe the whole stock; carrying cost puts a yearly price on it. For one item, the safety stock and reorder point follow from how much demand varies.
- Stock turns and days on hand
Cost of goods sold ÷ average stock value; days on hand are 365 ÷ turns.
- Carrying cost
Average stock value × (capital + storage + insurance and taxes + risk).
La Londe and Lambert set out carrying cost in these four parts: the money tied up, the space, the service the stock needs and the risk it runs.
- Safety stock
Service level factor × day-to-day variation of demand × √lead time.
The factor comes from the normal distribution: 1,64 for 95%, 2,33 for 99%. The formula assumes a fixed lead time and demand that varies independently from day to day.
- Reorder point
Average demand × lead time + safety stock: order again when stock falls to it.
All the figures are yours and the formulas are the textbook ones. Run on your stock records, the same formulas give every item its own safety stock.
Sources
- Bernard J. La Londe and Douglas M. Lambert, “A methodology for calculating inventory carrying costs”, International Journal of Physical Distribution 7(4), 1977: carrying cost as capital, inventory service, storage space and inventory risk costs. doi.org
- Edward A. Silver, David F. Pyke and Douglas J. Thomas, Inventory and Production Management in Supply Chains, 4th edition, CRC Press, 2017: safety stock for demand that varies from day to day and a fixed lead time.