Understanding Inventory Control Charts for Inventory Health Assessment

Maintaining the right level of inventory is critical for supply chain leaders to ensure smooth operations and for meeting customer demand while keeping costs in check. The basic questions that arises while planning inventory are -

• What is the inventory health level based on current stock-on-hand?
• When should we reorder products or raw materials based on my inventory constraints?
• What is the acceptable range for inventory levels?

Inventory control charts are designed to answer these fundamental questions about stock management.

Inventory control chart is a powerful tool that helps organisations monitor and manage their inventory levels efficiently.

What Is an Inventory Control Chart?

An inventory control chart is a graphical representation of inventory levels over time. It allows businesses to track the amount of inventory they have on hand and set appropriate reorder points.

Components of Inventory Control Charts

• Ideal Inventory Level: Ideal inventory line is the optimum inventory level after replenishment based on velocity of the product. Inventory levels above this value means excess inventory.
• Reorder Point: The reorder point is the inventory level at which you should reorder a product to avoid stock-outs before the new order arrives. It takes care of inventory constraints like lead times and safety stock.
• Safety Stock: Safety stock is an extra quantity of inventory kept on hand to buffer against unexpected fluctuations in demand or delays in the supply chain. Safety stock can either be determined using statistical methods like standard deviation of demand or lead time, or it can be based on historical data and desired service level.

Identifying Inventory health based on Inventory Control Charts

At TrueGradient AI, we use this graph to identify health of inventory for each product combination. We have divided the area of chart into 5 parts-

1. Excess Inventory: Inventory Level > Ideal Inventory

• Excess Inventory, often referred to as overstock, occurs when a business has more inventory on hand than is needed to meet current or future demand.
• Excess inventory lead to increased holding costs, reduced warehouse space, and may lead to waste.
• Decision makers may use markdown/promotions to clear excess inventory

2. Stable Inventory: Ideal Inventory > Inventory Level > Reorder Point

• Stable Inventory represents an optimal and balanced level of inventory. It indicates that the amount of inventory on hand matches the current demand and is well-managed.
• No action is needed by decision makers at this inventory level though continues monitoring is important for timely PO creation at reorder point

3. Low Inventory: Reorder Point > Inventory Level > Safety Stock

• Low Inventory signifies that the available stock is nearing the minimum required safety stock levels to meet demand.
• At this point, purchase order should already have been placed based on lead time of business.

4. Critical Inventory: Safety Stock > Inventory Level > 0

• Critical Inventory indicates that the available stock has fallen below the safety stock levels to meet demand, posing an imminent risk of stock-outs.
• Various factors, such as supply chain disruptions, unexpected demand spikes, or delays in deliveries, can lead to critical inventory situations.
• Critical inventory is a red flag that immediate action is needed to prevent stock-outs, which can result in lost sales and customer dissatisfaction.

5. Out of Stock: Inventory Level = 0

• Out of Stock means that a business has completely run out of a particular product, and it is not available for customers to purchase.
• Out-of-stock situations can occur due to poor inventory management, demand exceeding supply, production delays, or unforeseen supply chain disruptions.
• Being out of stock can result in lost sales, and may drive customers to competitors. It’s a situation businesses aim to avoid.

Effective inventory management strives to maintain inventory at stable levels while minimising excess and critical inventory situations. By creating and regularly updating inventory control charts, businesses can make informed decisions about when and how much to reorder, leading to better decision making and improved performance.

If you’re looking to refine your inventory planning and drive business success, feel free to contact us at info@truegradient.ai for a personalised consultation.