Is your MIN a guess or a calculation?
by Alan Skedd - February 2013

The most misunderstood - and often times most destructive - variable in managing inventories is the minimum stocking level or MIN.  It is usually a guess by a well meaning inventory manager.  It is usually updated once every few years.  It is usually overstated.  It is usually wrong.

Current Stock Status systems use this variable as a key component of replenishment planning.  These systems process instantaneously as transactions occur.  They trip a new order as soon as the level drops to this MIN value.  Sounds like a great solution - maybe like a lawn sprinkler set on a timer.  Set it and forget it.

Therein lies the problem with MIN values.  Set them and forget them.  They are usually set by a guess and are usually wrong.  Over time, they are forgotten.  As stocking conditions change, these MIN values don't change.  They usually become more and more distant from the proper value.

What should comprise a MIN value?  This should include a lead time forecast as well as a safety stock buffer.  There are several components which include:
  • A statistical forecast for the next 52 weeks
  • A statistical calculation of forecast error
  • A statistical calculation of safety stock based on the two above
  • An accurate lead time (does not have to be precise - just accurate)
  • Incorporation of adjustments and outside influences to the forecast
Most Stock Status systems lack comprehensive forecasting which means they are not designed to determine proper MIN values.  These systems rely on the user to populate MIN values.  If done properly, Stock Status systems can work well.  If not, they create havoc when it comes to availability and excessive cost.

For example, a part may have a MIN set at 100 pieces.  If it is a $500 part then the MIN translates into a $50,000 investment.  As long as the MIN is not tripped, the Stock Status system thinks all is well.  If this MIN was a guess - and annual usage is only 10 pieces - then no orders are placed.  Still, the Stock Status system thinks everything is fine.  The problem here is that Stock Status systems do not concern themselves with overstock conditions - as long as the MIN has not been tripped everything is fine.  In this case, a bad MIN guess has cost the company carrying cost on $46,000 - each year - because it has caused excessive over ordering.

An initial MIN has an impact on Distribution operations.  It has an impact on manufacturing operations.  It has an impact on active (fast moving) parts.  It has an impact on spare (slow moving) parts.  Yet most operations have no tool to determine the proper MIN.  They simply render a guess and forget about it.

Experience has shown that a high percentage of obsolete inventory became obsolete due to excessive MIN values.  Consider the following:
  • High MIN values trigger a high level of ordering
  • High levels of ordering, in turn, create a high level of inventory
  • High inventory levels are often not completely consumed
  • Stock Status won't catch these excessive orders (only looks at MIN)
  • The inventory manager doesn't look for proper MIN values
  • The Inventory manager has no tool to check stocking performance
  • The inventory manager wonders why the inventory is growing
  • Obsolete inventory seems to grow and no one knows why
How can this dilemma be solved?  A bright and forward thinking inventory manager needs to change conventional thinking on the "one stop shopping" approach to inventory management systems.  Any of the premier Stock Status systems available today can accommodate "add on" or "bolt on" solutions that address these problems.  Create a small extract - process this data outside the system - then return the results back to the Stock Status system.  These premier systems may discourage this practice because specialty areas are not something they do.  They may also discourage this practice because they don't want to miss any additional fees.  They may discourage this practice because they simply do not have staff that can extract the data.

The phrase "think outside the box" is appropriate here.  Stock Status systems are not designed to calculate the proper MIN value.  The inventory operation relies on a proper MIN value.  There are usually far too many items to calculate this MIN value for each part.  A wide variety of "add on" software exists to address MIN values.  This "add on" software is inexpensive and easy to use.  The reduction in inventory investment - due to lower and more appropriate MIN values - often helps pay for the Stock Status system.  It always pays for the "add on" software that corrected these values.

The Decision Associates' solution is the Min Management System (MMS), the perfect way to set MIN, MAX, EOQ, and Safety Stock.  The simplified user interface makes the task a breeze.  You can learn more about the MMS by clicking MMSREF .