Minimum and maximum inventory: what it is and how to calculate it
To know how to handle inventory control, you also need to understand the concepts of minimum and maximum inventory. Vital to running your operation efficiently, both affect how many supplies your business has on hand to serve customers.
Check out more about these key concepts below and learn how to put them to work in your business's daily routine.
Learn more: 9 mistakes you can't make in restaurant management
The main inventory control processes
Minimum inventory and maximum inventory are part of a larger process: controle de estoque. É através dele que é feito o gerenciamento das mercadorias usadas pelo bar ou restaurante desde o momento da compra até a venda deles.
That's how an inventory manager can identify which items are available and when they need to be restocked – or, on the other hand, when there is already enough.
Inventory control includes internal processes such as:
- listing every item in inventory and classifying them;
- labeling the inventory items;
- checking that everything is stored correctly;
- on an ongoing basis, recording every time an item enters or leaves inventory.
Calculating minimum and maximum inventory is essential for efficient inventory control, since these indicators help you understand the reorder point and inventory turnover. Learn more below!
Leia também: Inventory turnover: what it is, how to calculate and manage it
What is minimum inventory?
As the name suggests, minimum inventory refers to the minimum quantity of a given product that must be in your inventory so it can be replenished without negatively impacting the operation.
Also known as safety stock, it is what allows a restaurant or bar to operate without ever running out of a dish or drink, even during a spike in orders.
This keeps you protected against all kinds of surprises, such as a lack of suppliers, delivery delays, an unexpected surge in orders, among others. That's why minimum inventory needs to be calculated for every supply in your inventory.
How to calculate minimum inventory?
But how do you do this in practice? The good news is that there is a formula that helps you calculate minimum inventory. But before using it, you need to gather two pieces of information: how long it takes to restock that item in inventory and what its average consumption is over a month.
To find an item's average consumption, you need to divide its total consumption by the days in the month.
For example, if your business has an item with 300 units consumed in a month, just divide 300 by 30 and there you have its monthly average consumption.
In this case, the average consumption is 10 units per day (300 / 30 = 10).
Then, to finally find the minimum inventory for that item, just apply the formula below:
Minimum inventory = average daily consumption X restocking time.
Continuing with our example, we already know that the average consumption of a given supply is 10. Now, let's say the average time for the supplier to restock the item is 10 days.
So, its minimum inventory will be 100. (10 X 10 = 100).
In other words, you always need to have 100 units of the product in your inventory to avoid running out of it without enough time to restock.
What is maximum inventory?
Maximum inventory, on the other hand, is the flip side of that coin. It indicates the maximum amount of a given supply your inventory can hold without generating waste.
In other words, when the maximum inventory is exceeded, it affects the quality of your products and also your sales volume. That's because with inventory packed beyond capacity, products end up losing their profitability or even passing their expiration date.
As a result, they stop being appealing and cause losses not only to your operation but also to your cash flow.
How to calculate maximum inventory?
To avoid leaving money on the table and taking losses in your cash flow on top of that, it's important to know how to calculate your business's maximum inventory.
This number is the result of the minimum inventory (which you now know) plus the replenishment lot, which is information you need to gather for each item in your inventory. So, the maximum inventory formula is as follows:
Maximum Inventory = Minimum inventory + Replenishment Lot
Let's see how this calculation works in practice, following the previous example.
As you'll remember, the minimum inventory for the supply analyzed is 100 units. And let's say your supplier's replenishment lot is 50 units – remember, you need to check this figure with your suppliers for every item in inventory.
That means your maximum inventory for this supply is 150 units (100 + 50 = 150).
Why do minimum and maximum inventory matter?
As you have probably already realized, keeping an eye on minimum and maximum inventory is essential to running your operation properly.
That way you avoid being caught off guard when you realize you have run out of a supply, and you don't take big losses because of products sitting idle in inventory – often even passing their expiration date.
This helps cut costs, maximize profits and also gives your business greater predictability. After all, information is power: in this case, it means being able to predict how much and when you'll need to buy more supplies, or to understand what isn't selling well.
How to control minimum and maximum inventory the easy way
Although it's vital to a business's operational and financial success, controlling minimum and maximum inventory is often left aside. Why? Because keeping that control can be a real challenge.
Although the calculations themselves are simple, inventory control isn't quite that easy. To pull it off, you need a deep understanding of each supply's life cycle, your customers' behavior and your business's production routine.
Also, you need to keep constant, reliable management of the numbers, updating them daily so that no error or even fraud slips through.
Leia também: 11 tips to control inventory inflows and outflows
For this, it's common to rely on spreadsheets, tools or even good old (and, let's be honest, inefficient) pen & paper, which is exactly what makes control harder.
The more time you spend updating spreadsheets and crunching the numbers, the greater the chances of human error.
Fortunately, there is a much easier and more intuitive way to manage minimum and maximum inventory: Using a Bar and Restaurant Management System. Com ele, assim que um item é comercializado, o estoque já é atualizado automaticamente, podendo até emitir alertas sobre a quantidade de um insumo.
Plus, this kind of solution offers other features, such as integration between POS, KDS and Self-Service Kiosk, digital menu, electronic tab and much more. To find out how to get this system in your business, Talk to one of our specialists.
Frequently Asked Questions
What is inventory control?
It's the management of the goods used by the bar/restaurant from the moment of purchase through to their sale.What is minimum inventory?
It's the minimum quantity of a given product that must be in your inventory so it can be replenished without negatively impacting the operation.How to calculate minimum inventory?
Start by gathering two pieces of information: how long it takes to restock that item in inventory and what its average consumption is over a month. To find an item's average consumption, you need to divide its total consumption by the days in the month.Then, to find the minimum inventory, apply the formula: Minimum inventory = average daily consumption X restocking time.
