# 2.4.22 How much inventory do we need?

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How much inventory do we need? In this lecture, we’re going to talk about inventory and inventory is typically made up of two different pieces. One is Cycle Stock, the other one is Safety Stock. Now, Cycle Stock has to do with the inventory that goes up and down during regular sales and replenishment. Safety Stock, we hold it just in case something we did not anticipate happens. So we don’t really expect it to be used, but it’s there if we need it. It’s like an insurance policy. Let’s look at an example. We are going to assume that we have a little company that sells 20 units per day and every time they get a shipment, they get 200 units and that’s what we call cycle stock. So this cycles up and down, as we get our replenishment.
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And because we get 200 at day 1, we have zero at day 10, the average inventory that we have to hold is 100 units.
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The future is not always certain, that’s why we cannot rely on stock alone and we need something called Safety Stock. Now, uncertainty can come in two forms. One, our demand is not what we expected it to be. Two, our replenishment may not arrive when we want it to arrive. And for those reasons, we need to hold Safety Stock. One of the things that can happen is that demand is not always what we think it is. Let’s assume our products are flying off the shelf rather than selling 20 units worth of product everyday, we sell 25. What does that mean in detail? We still get our 200 units every 10 days. We also are selling 25 units per day. That means after eight days, we have nothing left. For that reason, we hold Safety Stock and how much Safety Stock do we need? 25 units per day over 2 days means 50 units worth of Safety Stock. Another case, the replenishment does not arrive when we expected to arrive. So, let’s look at that. We got our 200 units worth of inventory. We expect it to last for 10 days, but the shipment does not arrive on day 10, it arrives on day 12. So, what does that mean in terms of Safety Stock? We need to bridge two days with inventory. We sell 20 units a day. We need 40 units of Safety Stock and that is why our inventory is much higher than before. Now let’s put both cases together, this is where stuff really goes crazy. We sell 25 units per day and our replenishment arrived late, that means 4 days without inventory and we need to hold safety stock to bridge those 4 days with 25 per day. That means we need 100 units worth of Safety Stock. See our average inventory just went up from 100 before without any uncertainty to 200. An inventory’s pretty expensive.

Jim Rohn Sứ mệnh khởi nghiệp