Sometimes enterprises accumulate trade balances at the most popular positions. However, increasing stocks to infinity is impossible. It is necessary to determine the optimal order size. For this purpose, the Wilson formula is used.
Kinds
The balances in warehouses are divided into production and commodity. The first category includes purchased stocks intended for the manufacture of products. Their purpose is to ensure an uninterrupted production process. Inventories - these are stock balances and those that are on the way to wholesale and retail enterprises.
Current stocks are designed to ensure an uninterrupted process of trade or production in between supplies of goods. Safety stocks are accumulated for the same purpose, but in the event of unforeseen circumstances: change in the supply lot, increase in demand, or delays in transit. In a normal market situation, the value of insurance stocks does not change.
Why stockpile?
Stocks in the economy ensure the stable operation of the system. But this method is quite expensive. According to foreign sources, storing a unit of products worth $ 1 costs 25 cents per year. Domestic economists give similar indicators - 20-30% of the value of the goods. If the company has stocks worth 100 million rubles, then it spends another 25 million to maintain them.
The risks
Stocking has several disadvantages. It:
- freezing financial resources;
- suspension of the quality improvement process, as the organization first of all eliminates stocks, and then buys new products;
- isolation of logistics in the distribution scheme;
- expenses for the maintenance of special premises and wages of storekeepers;
- risk of losses due to damage or theft of property.
Based on how much the organization incurs storage costs, the entire inventory management process is determined. Wilson's formula helps to calculate the amount of stocks that need to be reduced. Although the storage of products involves risks, entrepreneurs are forced to take them, since the lack of stocks entails a loss of profit.
The result of calculations obtained using the Wilson model, the formula of which was presented earlier, should be compared with other expenses. The cost of purchasing each type of product should be less than the cost of storing it. Only then does it make sense to stockpile.
Management issues
- A large number of factors affect the size of an order: its size, uneven consumption, remoteness of the supplier, and logistics.
- Inventories can be formed both for current deliveries and for seasonal sales.
- A large number of inventory control systems: from periodic to continuous.
- With the expansion of the assortment, the risk of calculating the optimal delivery lot increases. Wilson's formula does not exclude this risk.
- Increased lead time in regions with cheap labor.
Term
The optimal order size (Wilson's formula) is a model with which you can determine the economically viable order size with minimal overhead. It is used under the following conditions:
- The demand for products and delivery time are clearly known.
- Receipt of goods is carried out instantly.
- There is no shortage and wholesale discounts.
Wilson's formula
The optimal order size is TC = PR + CR / Q + PFQ / 2, where
- Q - order size;
- C - placement costs;
- R is the annual demand;
- P - the cost of acquiring 1 piece of product;
- F is the ratio of storage costs (usually 10-15%).
- PF - storage costs for the year.
For whom?
Wilson's formula was developed for large industrial enterprises. It can not be used in this form in modern trading companies. The first step is to expand it to take into account the costs of debt and a wide range of products. Only then can Wilson's formula be applied to a group of weighty (ABC analysis) and stable products (XYZ analysis).
Other indicators
Not only Wilson’s formula can be used to manage inventory. In economic theory, there are a number of other coefficients that refine the calculation results.
Stock turnover shows how many times the product goes through all sales cycles for a specified period of time. Using this indicator, you can calculate the possibility of obtaining gross profit from one ruble invested in the purchase of goods:
Oz = Cost of purchased goods per month (quarter, year) / Average stock of goods for the same period.
When calculating the indicator, products purchased for a specific order are not taken into account.
Provision with reserves - for how many days the current reserves of the organization will be enough if supplies suddenly stop:
Total = Stock value x Number of days / Average stock of goods
The proportion of stocks in current and non-current assets:
Ud = Cost of stocks / OA (NMA)
ABC analysis
This calculation method determines the most important resources of the company. It can be used on all types of organizations. It is formed on the principle of Pareo: 80% of the turnover gives 20% of the goods. Reliable control of this part of the resources (reserves) will make it possible to control the system as a whole.
As part of the ABC analysis, the product positions are divided into three categories:
- And the most profitable ones: 20% of the assortment brings 80% of orders.
- In - intermediate: 30% of the assortment brings 15% of sales.
- C - the least valuable: 50% of the assortment brings 5% of orders.
ABC analysis is a ranking by parameters. Moreover, you can sort not only products, but also buyers, the length of the sales period, and other important statistics. The goal is to group objects according to their degree of influence on the final result. In the process of analysis, a graph is also formed, which is called the Pareto curve (Lorentz or ABC-curve). The same method can be used to rank customers by the number of orders in logistics. Wilson's formula is unsuitable for this purpose.
Grouping of objects can be carried out by cost indicators. In this case, the share of objects and the total result are added (for example, if a product brings 50% of orders, this value doubles). The value of the amounts ranges from 0% to 200%. Groups are formed according to the following criteria: A - 100%, B - 45%, C - the rest.
XYZ analysis
Another way to determine the optimal order is to calculate the coefficient of variation (XYZ analysis). It reflects the scatter of the value relative to the average (order volume, sales level, number of customers, etc.). With its help, it is possible to exclude the influence of seasonal factors on the final indicator. In the calculation process, the standard deviation percentage formula is used.
Information is ranked as follows:
- X - the most minor changes in the average value (0-10%);
- Y - changes in values by 10-25% of the average;
- Z - change in values by more than 25%.
The first two groups of indicators have the greatest impact on the final result.
Thus, before applying the Wilson formula, it is necessary to determine the most significant groups of goods for the organization, and then calculate the marginal volume of stocks.