- ecommerce
- Inventory Management

June 27, 2022|BY Matt Kenyon

The bare minimum of keeping customers happy in ecommerce is to meet their expectations. That means having the right product in stock, shipped on time, and delivered with no issues.

Needless to say, stock-outs are one of the easiest ways to lose sales (as well as frustrate customers and hurt your brand’s reputation).

To ensure your business never runs out of a product, you must always be aware of your minimum inventory levels. This figure will tell you how much stock you should always have on hand in order to meet customer demand.

There are a few different methods that can be used to calculate minimum inventory levels, all of which we’ll review in this post.

The three primary methods are:

- Average Demand method
- Safety Stock method
- Reorder Point method

We’ll go over how they work, specific formulas, and hypothetical examples of each in an ecommerce context. Let’s dive in.

**What are minimum inventory levels?**

Your minimum inventory levels are the lowest amount of a product that you can have in stock and still be able to meet customer demand.

This number is important because it helps you avoid running out of a product, which could lead to lost sales and unhappy customers.

**Why do you need to know your minimum inventory level?**

There are a few reasons why it’s important to be aware of your minimum inventory levels. First, as we mentioned, it helps you avoid running out of stock. Second, it can help you save money on storage costs.

If you have too much stock on hand, you may have to pay for storage space that you don’t need.

By keeping your minimum inventory levels in mind, you can avoid the costs of overstocking. Finally, knowing your minimum inventory levels can help you make better decisions about how much stock to order.

If you order too little, you may run into the issue of not being able to meet customer demand. However, if you order too much, you may end up with excess stock that you have to store.

**How to calculate minimum inventory levels**

Now that we’ve discussed why it’s important to know your minimum inventory levels let’s talk about how to actually calculate them.

There are a few different methods you can use, but we’ll start by focusing on the most common one: the Average Demand method.

To calculate your minimum inventory level, you need to know two things:

- The average amount of time it takes to sell a product
- The average daily demand for a product

Once you have this information, you can use the following formula:

Minimum Inventory Level = Average Daily Demand x Average Time to Sell

Let’s look at an example to see how this works.

Suppose that you own a small business that sells coffee mugs. You know that on average, it takes you two days to sell a mug, and your average daily demand is five mugs.

Using the formula above, we can calculate your minimum inventory level like this:

- Minimum Inventory Level = Average Daily Demand x Average Time to Sell
- Minimum Inventory Level = five mugs x two days
- Minimum Inventory Level = ten mugs

This means that you should always have at least ten coffee mugs in stock.

**Another example**

Let’s look at one more example to see how this formula works.

Suppose you own a clothing store and you’re trying to calculate your minimum inventory level for t-shirts. You know that on average, it takes you three days to sell a t-shirt, and your average daily demand is ten t-shirts.

Using the formula above, we can calculate your minimum inventory level like this:

- Minimum Inventory Level = Average Daily Demand x Average Time to Sell
- Minimum Inventory Level = ten t-shirts x three days
- Minimum Inventory Level = thirty t-shirts

This means that you should always have at least thirty t-shirts in stock.

Calculating your minimum inventory levels is a critical part of running a successful business. By using the formula above, you can ensure that you always have enough products in stock to meet customer demand.

**Using the safety stock method**

Another method for calculating minimum inventory is the safety stock method. With this method, you add a certain amount of extra product to your minimum inventory level in order to account for things like supplier delays or unexpected spikes in demand.

To calculate your minimum inventory level using the safety stock method, you need to know four things:

- Your average daily demand – the average number of products that are sold each day.
- Standard deviation demand – a measure of how much your demand varies from day to day. It tells you how much you can expect your demand to fluctuate. If your standard deviation is high, that means that your demand varies a lot from day to day. If your standard deviation is low, that means that your demand is less volatile.
- The average lead time – the average amount of time it takes for you to receive a new shipment of products from your supplier.
- The desired level of safety – how much extra stock you want to have to account for variability in demand. This could be a percentage (e.g., 20%), or it could be a fixed number of units (e.g., 100).

Once you have this information, you can use the following formula:

Minimum Inventory Level = Average Daily Demand x (Standard Deviation of Demand) x (Average Lead Time) x (Desired Level of Safety)

For example, let’s say that you’re trying to calculate the minimum inventory level for your coffee mug business.

You know that your average daily demand is five mugs, the standard deviation of your demand is two mugs, the average lead time is one day, and the desired level of safety is two.

Using the formula above, we can calculate your minimum inventory level like this:

Minimum Inventory Level = Average Daily Demand x (Standard Deviation of Demand) x (Average Lead Time) x (Desired Level of Safety)

Minimum Inventory Level = five mugs x two mugs x one day x two

Minimum Inventory Level = forty mugs

This means that you should always have at least forty coffee mugs in stock.

As you can see, calculating your minimum inventory levels is a critical part of running a successful business. By using the formula above, you can ensure that you always have enough products in stock to meet customer demand.

**Reorder point method**

The last method that can be used to calculate minimum inventory levels is the reorder point method.

To use this method, you must first determine how many units of a product are demanded each day, week, or month.

Once you have this number, you will then multiply it by the number of days, weeks, or months it takes for you to receive a new shipment of the product.

The formula looks like this:

Reorder Point = Average Demand per Day x Number of Days it Takes to Receive New Shipment

For example, let’s say that your business sells widgets, and you receive a new shipment of widgets every week.

If you determine that your business sells an average of 100 widgets per day, you would multiply 100 by seven (the number of days in a week) to get your minimum inventory level of 700 widgets.

**Final thoughts**

There are three main methods that can be used to calculate minimum inventory levels: the safety stock method, the reorder point method, and the formula method.

Each of these methods has its own advantages and disadvantages, so it’s important to choose the one that is best suited for your business.

By using the information in this blog post, you can ensure that you always have enough products in stock to meet customer demand.

If you’re overwhelmed by the idea of tracking all these metrics manually, it’s high time to invest in an inventory management solution like SkuVault.

SkuVault exists to automate the tedium of managing your inventory, including giving you automated reorder point alerts based on inventory thresholds.

And this just scratches the surface of how SkuVault Core can help you save hours of time and loads of headaches in running your ecommerce business.

For a more detailed breakdown of how SkuVault Core can level up the logistics in your organizations, check out this page to go deeper. Or, click to schedule a live demo.

#### Author

Matt has been helping businesses succeed with exceptional content, lead gen, and B2B copywriting for the last decade. When he’s not typing words for humans (that Google loves), Matt can be found producing music, peeking at a horror flick between his fingers, or spending quality time with his wife and kids.

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