The Min/Max inventory technique is a basic type of inventory management system. Here, the ‘Min’ value refers to the minimum amount of stock required to trigger a reorder. The ‘Max’ value refers to the new stock target after reorder.
It is considered a crude inventory reordering system, but it does not mean that you cannot achieve good inventory results by using this method. So what type of companies can benefit from the min/max inventory management technique?
Companies where market demand is infrequent – Companies that cater to markets with infrequent order patterns are best suited to this technique. Basically, you must have a long sales cycle. Maintaining a good inventory count can help you capture such infrequent orders.
Companies where product portfolio is large – Companies with large product portfolios can also benefit from this technique. Some products may be loss leaders. A loss leader is a product that is sold below its market price to stimulate the sale of other profitable products, like milk kept in the far aisle of a supermarket.
To reach the milk, you have go through other aisles where the profitable products are kept. The supermarket hopes that you will buy some of the other products on your way. So maintaining such an inventory may be seen as a liability but it is a necessary evil because it helps the company close other sales.
Companies with a ‘me-too’ product offering – Some companies make products that have no differentiating qualities except their price. Without a good inventory count, these companies can find it very difficult to capture sales on such lines. Such companies can also use this technique. Some companies also use their large inventories to control the price of the product in the market.
Strong economies of scale – One of the biggest beneficiaries of the min/max inventory technique are companies that practice economies of scale. With this technique, they can lower the purchase price and freight costs of materials.
Holding inventory comes with two costs. Sometimes, the demand is low but you are holding an inventory of finished goods. Here you may have to bear costs such as obsolescence, damage, theft and high financing costs. The second cost is lost sales. When you don’t have inventory, you lose sales. When you lose sales, you lose profit and ultimately, customers.
This is where a min-max inventory management system can help you. The major advantage of this system is that it is very simple to implement. You can use this technique to service a market which shows seasonal demand from customers.