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Tuesday, February 28, 2012

Red Line Inventory

One of the simplest forms of inventory management is called “Red Line Inventory.” This is an old version of what became known as Model Stock. In theory, it is so simple that no one could possibly mess it up. In all my years of management, with only two exceptions, I have never come across anyone who could not comprehend and use the Red Line or Model Stock inventory systems.
The idea of Red Line Inventory is that you draw a red line around the walls of your stock room. Cases of merchandise are stacked up along the walls. When the stock falls below the red line, it is time to reorder. When the new stock arrives, the old stock is moved, the new stock is placed at the bottom of the stack, and the older stock is piled on top of it. Once the correct reorder point is found, this system is virtually fool-proof.
In Model Stock it is basically the same. Instead of drawing a red line on a stock room wall, the store will start with an estimate of how many of each product is needed to begin an order cycle. In time, the store will be able to calculate how many of each product they need to keep in stock. The goal is to keep one and a half times the stock that would normally be sold in an order cycle. So, if the store sells twelve cans of green beans in an order period, then the store would keep eighteen cans in stock. Each time an order is placed, whatever it takes to fill that stock back up to the one and a half times level is ordered. If the store normally sells twelve cans of green beans in an order cycle, the person placing the order will look to see how many remain. If six cans of green beans remain, then the order will be for twelve cans.  When the new stock comes in, the old stock will be placed in front and/or on top of the new stock. This keeps the stock rotated. Sometimes it isn’t possible to keep exactly the proper amount on hand. In some cases, the store knows it only needs to keep eighteen in stock, but the product must be ordered by the case of 24. The store needs to decide at what point it should reorder this case. The trick is not to run out, but not to tie up too much in inventory and not to let merchandise stale out.

Take a look around your store. Is your inventory under control or is your inventory controlling you?

The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
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