Storing more inventory than needed creates blocking of money which can be used for other purpose and if the inventory level is too low to meet the needs of the customers business will be lost. In order to maintain an accurate level of inventory, it is crucial to keep track of the inventory not to cross the excessive mark and not being able to meet the demand of customers. Due to these reasons, it is essential to calculate the demand for inventory in supply chain and logistics management.
The Economic Order Quantity method of inventory management utilizes the ideal amount of inventory that is sufficient to meet the order at a time which is depend on the demand. This is done when there is a steady demand for a particular amount of order. This order number is being multiplied by two and by the cost per unit. This is value is then divided by the cost of holding a piece of product for one year and square root of this is taken for this value. This will be the Economic Order Quantity that is to be maintained at the inventory.
The ABC Classification system of inventory management is used when there is more than one kind of products available. Breaking down of inventory into several sections based on the demand is used for ABC analysis. It is necessary to find out the product which is having high demand in order to set priorities for the product. The product with higher demand will be ordered first to meet the demand of the customers.
In certain cases where the demand varies over time during a period, it is essential to keep a reorder point in order to meet the demand consistently. For this kind of inventory management, there are several software available both online and offline which can be purchased based upon the extent of requirement. Most of the companies keep a safety stock level which keeps the inventory level to a particular level in order to avoid losing customers due to non-availability of stock.