Safety Stock (Minimum Inventory Level): This is the emergency buffer of inventory kept to prevent stockouts, typically used in situations of unexpected demand spikes or supply chain delays. Safety stock levels are crucial for businesses that experience variable demand or have long lead times from suppliers. It acts as an insurance against the unpredictable nature of supply and demand.
Reorder Point: The reorder point is the specific level at which new stock must be ordered to replenish inventory. It is calculated based on the lead time of the supplier and the company's average inventory usage over that period. This level ensures that new stock arrives just before the existing stock runs out, maintaining a smooth supply chain flow.
Maximum Stock Level: This level represents the maximum amount of inventory a business can hold at any given time. It factors in storage limitations, capital constraints, and risks associated with overstocking such as increased carrying costs and potential obsolescence. Setting a maximum level helps in optimizing inventory storage and reducing unnecessary expenses.
Target Stock Level: Target stock levels, also known as ideal inventory levels, are set to meet the anticipated future demand without overstocking. This level is often determined by analyzing historical sales data, market trends, and forecasted demand. It is a dynamic metric that can change based on sales patterns and market conditions.
