Managing Stock Levels: Strategies and Formulas

analytics wave chart: stock levels

Imagine you sell bathing suits—usually considered seasonal inventory since people tend to buy them during warmer months. For this reason, retailers in your industry might let inventory levels drop slightly during colder seasons. 

Now imagine there’s an early April heatwave. Suddenly, shoppers want to swim, and many want new bathing suits. They flood vendors with orders, and most places immediately sell out—but not your store. Unlike your competitors, you invested in inventory management software, adequate storage space, and well-honed logistics operations to maintain optimal stock levels. While your competitors are caught unprepared, you meet customer demand and capitalize on the opportunity. 

Luckily, you don’t have to imagine. You can learn how to optimize your stock levels and win more business. Here’s an overview of retail stock management and strategies for maintaining the optimal inventory level of your products.

What are stock levels?

A stock level, or inventory level, is the number of units of a specific product a retailer has on hand. These items may be kept in physical stores or offsite storage facilities. A solo ecommerce store owner might keep stock at home to cut down on storage costs or partner with a dropshipping supplier that stocks the products and ships them to customers.

How do companies manage stock levels?

Companies manage their stock of products by calculating optimal inventory levels based on past sales data and ordering enough product units to maintain these levels—often in real time. Increasingly, stock control is done (or improved) with inventory management software, which monitors stock levels by tracking outbound sales and inbound product deliveries. It automatically reorders new units as needed.

An item’s reorder point, or the point at which you order additional stock, may vary based on seasonal or economic factors. For instance, you might bump up your average stock level after rolling out new sales channels. A sporting goods company might keep 100 to 130 tennis rackets in its warehouse and automatically reorder from its supplier when the stock dips below 110. 

When the company establishes a new online sales channel—such as creating a storefront on Instagram—and anticipates selling more units as a result, they bump up the minimum stock level to 200 tennis rackets and reorder when it dips below 220. They also increase their reordering quantity, meaning each shipment contains more rackets than it used to. These adjusted stock levels help meet increased demand going forward.

Required inputs when calculating stock levels

The following inputs will help you calculate your stock levels.

  • Normal consumption. The average consumption of a product within a given period under normal demand. For instance, 150 units per quarter.
  • Minimum consumption. The fewest units you can foresee selling during a slow sales period—for instance, the number of bathing suits you predict to sell in November.
  • Maximum consumption. The most units you can foresee selling during a robust sales period. For instance, how many coolers you think you’ll sell before a college football weekend.
  • Reorder point. The point at which you must reorder inventory so as not to run out—also called a reorder level.
  • Economic order quantity. The most cost-effective reorder quantity when stocking up. For instance, buying 500 units at a time to take advantage of bulk pricing discounts.
  • Minimum order lead time. The minimum time it takes to source new items from your supply chain. This is sometimes called the minimum reordering period.
  • Normal delivery time. The normal time it takes for shipments to travel from vendors in your distribution network to your shop or storage space.

Manage inventory from one back office

Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.

3 common stock levels to understand

Here are the three primary stock levels that you can calculate using these inputs:

1. Minimum stock level

Minimum stock level represents the minimum number of units to keep in stock to ensure a steady flow of operations. To establish a minimum stock level, you need to know the normal level of consumption (how much people buy during times of normal demand) and the normal lead times for getting more products. You must also consider the reorder point, which is the point at which you must reorder inventory from suppliers. 

How to calculate minimum stock level:

Minimum stock level = Reorder point – [Normal consumption × Normal delivery time]

2. Maximum stock level

Maximum stock levels, or maximum inventory levels, represent the maximum quantity of units you should keep on hand without reaching a costly state of excess inventory. To determine maximum stock level, calculate how much product you need during periods of minimum consumption and compare it to periods of normal consumption.

How to calculate maximum stock level:

Maximum stock level = Reorder point + Economic order quantity – [Minimum consumption × Minimum order lead time]

3. Average stock level

Average stock level represents the optimal stock level for reliably fulfilling orders while keeping inventory costs manageable. Not all companies calculate this metric similarly, because your optimal stock level may vary based on seasonal factors and economic conditions.

One way to calculate average stock level: 

Average stock level = Minimum stock Level + [0.5 × Economic order quantity]

4 strategies for maintaining optimal stock levels

  1. Strike a balance between danger levels and dead stock
  2. Use inventory management software
  3. Refine warehouse operations
  4. Use multiple suppliers

Whether you run an ecommerce business or a chain of brick-and-mortar stores, you benefit from keeping your stock at optimal levels. This lets you fulfill all customer orders without allocating too much capital to inventory and storage space. Here are four strategies for doing so:

1. Strike a balance between danger levels and dead stock 

You reach a danger level when your inventory falls below your minimum stock level, posing a risk to business operations. Some businesses stave off dangerous levels by keeping a buffer stock (or safety stock) of products in an off-site location that they can access in an emergency. 

However, order too much safety stock and you can end up with the opposite problem: dead stock. These are products that do not sell and tie up valuable resources like warehouse space, capital, and management attention. To minimize the risk of dead stock, avoid overstocking items with a narrow seasonal appeal or imminent expiration dates.

2. Use inventory management software 

Inventory management software is designed to help you efficiently track, organize, and control your inventory levels. This software provides real-time visibility into stock levels, automates inventory processes, and streamlines tasks like inventory tracking, order management, and replenishment.

Today’s inventory management software can handle tasks like batch tracking—grouping products with common characteristics (like expiration dates or assembly location). You can also use inventory control tools to calculate sales growth or a minimum stock level quickly. For instance, Stocky, a Shopify app, automatically syncs stock quantities as you receive, sell, return, or exchange products online or in-store—no manual reconciling necessary.

3. Refine warehouse operations

You can maintain more appropriate stock levels by optimizing your warehouse operations. For instance, if storage space is too expensive in your area, you could rent auxiliary space farther away to keep surplus stock. This lets you keep inventory at its maximum level without breaking the bank. 

If you’re an ecommerce business owner, consider replacing your warehouse with a distribution center that stores products and handles order fulfillment, essentially outsourcing the stocking process to a third party. (The downside is the distribution center usually commissions a cut of each sale.)

4. Use multiple suppliers

Don’t risk running out of inventory because your supplier can’t source raw materials or hits a snag in the production process. Even if you’re loyal to a particular supplier, keep others in your network in case of an emergency. It also helps to shop around. For instance, you may find better prices or a more favorable maximum reorder period.

Stock levels FAQ

What is a healthy stock level?

A healthy stock level lets you reliably fulfill customer orders without losing money on excess warehouse space or expiring items. You may need several quarters of sales data to ascertain a specific product’s optimal stock level.

How do stock levels impact a company’s supply chain and overall operations?

Stock levels are directly related to a company’s supply chain and operations. Businesses must have reliable supply chains to maintain required stock levels. Meanwhile, retail operations rely on stocking enough products to fulfill orders quickly.

What are the consequences of inadequate stock levels?

Inadequate stock levels can prevent you from fulfilling orders. This leads to lost revenue and frustrated clients, some of whom may shift to a competitor.

How does accurate demand forecasting affect stock levels?

You cannot maintain appropriate stock levels without accurately forecasting demand. If your demand forecasts are accurate, you can sell products as they come into stock. If you underestimate demand, you can lose sales opportunities. If you overestimate demand, you may wind up with unsellable inventory and a net loss of revenue.