How to achieve the optimal stock level with abc classification?
Imagine you have 150 televisions in stock with an average sales volume of 100 units per period and a minimum order quantity of 20 units. The lead time is 7 days and given that you do not want to disappoint your customers with stock outs, you hold a safety stock of 50 units. When is the right moment to place a new order with your supplier and how much should you order?
The logical way of working out your requirement is as follows: on average, you sell 100 units per period, which equates to 25 units per week. In 4 weeks you will reach your safety stock level. Therefore, in order to avoid selling your safety stock, you decide to place your order in week 3. Given that you are expecting to sell another 25 units in week 4, you order twice the MOQ. You decide to order 40 new TVs in week 3.
The situation described above is easy to forecast. However, this is not realistic. Demand patterns are rarely as stable as this example. What would happen to demand if the item was subjected to a trend? And would you have enough on stock in case of an unexpected peak in demand? Also, how do you cope with changes in demand caused by item seasonality?
With ABC Classification Timing is key!
By increasing and decreasing your forecast and buffer stock for products with a seasonal demand in a timely manner, you can maintain an optimal level of stock. This way you can keep your costs low, whilst continuously delivering a high service level to your customers.
