If you have more inventory than you need, then you're inefficient. Excess inventory takes up space in your refrigerator or storage room and you run the risk of perishable items going bad. And if you think about it, having excess inventory is like having money on your shelves instead of in the bank, paying bills, or invested in something else.
Looking at the consequences, it seems preferable to have too much than too little. But better than that is to have just the right amount. To do this, it is useful to create a supply system based on an inventory analysis.
Initial concepts:
Inventory (uu): The quantity of product present in the production link at a given moment. It is usually measured in units (uu), although depending on the product it can also be measured in kilos (k), or in its economic value ($).
Reception: Flow of product received or purchased (uu) in a given period of time, for example, by days (d).
Dispatch: Flow of product sold or delivered (uu) in a given period of time, for example, by days (d).
Permanence (d) or cycle (d): It is the average time that a product remains in the inventory. It is usually measured in days (d).
Turnover (1/d): This is the number of times the inventory is renewed, and corresponds to the inverse of the cycle. That is:
As an example, the following illustration shows the inventory diagram of a australia business email list company that places four orders throughout the year. What is the inventory turnover?
The most common answer is that the turnover is 4 times a year. However, the average tenure is 1/8 years, so the turnover is 8 times a year.
Little's law
In order for the entrepreneur to estimate the optimal inventory, it is useful to know Little's Law. This law indicates a relationship between dispatch, inventory and permanence:
Example 1. If an oven can bake 15 empanadas in 40 minutes.
Delivery (empanadas/hour) = (15 empanadas / 40 mins) x 60 mins = 22.5 empanadas/hour.
Example 2. If a washing machine in a laundry has a capacity of 16 kg, and takes 15 minutes to wash, we can say that:
Dispatch (kg/min) = 16 kg / 15 min = 1,066 kg/min = 64 kg/hour
In the previous examples, the inventory was fixed, because it was determined by the capacity of the oven and the washing machine, and the dispatch is calculated based on that. However, it is possible to reformulate Little's Law, and find the optimal inventory if we know the frequency with which orders are received (dispatch) and the desired permanence for a product (according to its expiration date, for example). Little's Law can be reformulated as follows:
Example 3. A restaurant buys fish once a week. It knows that it sells an average of 4 fish dishes per day. What should its average inventory be?
Inventory (uu) = Dispatch (4 fish / 1 day) * 3.5 days = 14 fish.
Example 4. A cafeteria buys desserts from a supplier (cakes and pastries). These pastries stay good for two days, but after that they feel stale and are better to throw away. They sell about 25 slices of desserts on average each day. How many slices of cake should be on the counter at the beginning of each day on average?
Inventory (uu) = dispatch (25 servings / 1 day) * 1 day = 25 servings.
If you receive orders every two days, then orders must be for 50 units.
It should be noted that if orders are received every day, then the average shelf life would change to 0.5 (on average a portion should last half a day in the display case). In this case the average inventory would be 12.5 portions.