Calculate inventory indicators

Calculating inventory indicators is one of the first steps of every manager in logistics. The right inventory is an absolute prerequisite for good business management. Both from a cost perspective and from a service perspective.<!–more–>

Below is a short and simple explanation of the most important indicators. On the internet you can find many free [more complex] spreadsheets that can perform the calculations for you. Otherwise you can create your own spreadsheet with the formulas below, if your software package does not provide these indicators. You can also find more articles on my website that go into more detail about specific calculations and indicators.
<h3>COGS</h3>
The starting point is the Cost of Goods Sold. This concerns the direct costs of producing an article. It varies per company what is charged to this. Below is a list of the most common costs:
<ul>
<li>Direct material consumption</li>
<li>direct labor hours</li>
<li>Receiving costs</li>
<li>Returns</li>
<li>Storage costs</li>
<li>Direct overhead production</li>
</ul>

The calculation is as follows:
€ Opening stock + Purchases – Closing stock.

We will use the result of this later for other indicators.

The value of the stock can vary depending on the stock strategy. FIFO, LIFO or fixed settlement price.
<h3>Turnover rate</h3>
The turnover rate of the stock or article indicates the frequency an article is replaced [sold] within a certain period of time. With this ratio, you can quickly determine which articles perform well and what is dead stock.

The calculation is as follows: COGS / Average stock

The average stock is calculated as follows: (Opening stock + Closing stock) / 2

A low ratio means a low turnover rate. These articles deserve extra attention. The article may be phased out or there may be far too much stock. Sometimes organizations use Cost of Sales instead of COGS. This gives a false picture. Cost of Sales contains a markup or margin. <h3>Camp’s Formula</h3>
Camp’s formula is a mathematical approach to determine the optimal order quantity. The formula is also known as the Economic Order Quantity [EOQ]. It is a widely used formula, but it does have a few pitfalls. The formula is not immediately suitable for highly fluctuating demand. The formula also assumes a stable unit price and order costs. The latter is often not correct, because of the volume discounts that can be negotiated. But if you are just starting to optimize your inventory movements, the formula is an excellent first approach.

<a href=”https://addvise.net/wp-content/uploads/2024/12/formule-van-camp.png”><img class=”size-full wp-image-8552 alignleft” src=”https://addvise.net/wp-content/uploads/2024/12/formule-van-camp.png” alt=”formule van camp” width=”153″ height=”60″ /></a>

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D = expected annual usage
F = order or ordering costs per order
α = factor for inventory costs per year
K = cost price per unit
Q = optimal or economic series size
<h3>Re order point</h3>
The re order point is the moment at which you need to order new inventory to prevent out-of-stock situations. The safety stock is often taken into account in the calculation.

The formula for Re order point is as follows:
ROP = Demand during delivery time + safety stock

To calculate the demand during delivery time and the safety stock, you need to follow the steps below.

<b>Determine the demand:</b>
To do this, you need to determine the average sales in the same period:

Average sales = total sales / number of days in that period

<b>Determine the delivery time:</b>

Is the period from the moment of order to actual delivery in your warehouse. You can also use the average delivery time for this. More complex calculations take into account the standard deviation of the delivery time. I will not consider this here.
<h3>Safety stock</h3>
Safety stock is an additional buffer. This is often maintained if suppliers are not really reliable or if there are large fluctuations in the delivery time.

Safety stock = (maximum daily orders * max delivery time) – (average daily orders * average delivery time)
<h3>Minimum stock</h3>
Minimum stock is also known as iron stock. This is the absolute lower limit of your stock. To calculate this, we can use the previous indicators:

Minimum stock = Average sales per day * Delivery time in days
<h3>Maximum stock</h3>
Calculating maximum stock is necessary to prevent you from storing an excess of stock that is ultimately unsaleable. These are often major losses for companies.

Calculating maximum stock is as follows:

maximum stock = Reorder or order point + optimal order quantity -(minimum demand * delivery time)

Good luck!

<strong>Links</strong> :

<a href=”https://www.investopedia.com/terms/c/cogs.asp”>https://www.investopedia.com/terms/c/cogs.asp</a>

<a href=”https://nl.wikipedia.org/wiki/Formule_van_Camp”>https://nl.wikipedia.org/wiki/Formule_van_Camp</a>

<a href=”https://www.mecalux.com/blog/maximum-stock-level”>https://www.mecalux.com/blog/maximum-stock-level</a>