Expected Inventory

ss9Inventory levels rise and fall as supply and demand ebb and flow.  Inventory is at it's peak just as the next batch, kanban, or order arrives and then decreases as materials are consumed.  This rise and fall is known as cycle stock, the stock that exists during the replenishment interval.  In addition to cycle stock there may also be some amount of safety stock. While at any time the on hand quantity will cycle from minimum to maximum when you aggregate may items all with their own replenishment intervals and new stock arrival dates you can make a reasonable estimate of the expected or planned level of inventory by taking half of the cycle stock plus safety stock. Expected Inventory = 1/2*(demand * replenishment interval) + safety stock

There are 3 Comments

David's picture

Good article guys. The maths is correct and nice and clear. Not many books on the subject achieve this. Well done. I think, though you might need to just explain the Murphy element! ;-)

lloucka's picture

Do all the math you want, there may be conditions of abnormal supply or demand that you may want to buffer for where math won't help. Murphy's Law applied to safety stock. For example, I once had a key supplier on the west coast of the USA and manufacturing plants in the mid west. Every winter mountain passes through Colorado would get blocked due to snow storm, and so we would add a few days of Murphy Stock for December to March. How much to add and for how long was simply a judgement, not a calculation.