Finance Questions? Ask a Financial Expert for Answers ASAP
Inventory holding cost is one of the major cost in an organization and as such keeping low inventory level is always a major concern of an organization .
The levels on Inventory are calculated keeping many factors in view.These include Accuracy level ( % ) of Sales forecast vs Past Actual, Standard Customer Order Lead Time - Domestic / Export Sales, Plant capacity, Economical Run Qty, Customer Service level - >95% meeting Order Date, and many more factors other than these.
Coming now to your Query, Optimal Inventory Levels are Calculated by utilizing (1) The Par Stock Approach, and (2) The Levinson method
Inventory Levels in Percentage of Sales Volume :
There are two thumb rules for the Inventory levels in Percentage of Sales Volume.
1. Inventory values should equal no more than 1 percent of total annual sales volume.
2. Inventory values should not be more than approximately onethird of the average monthly product sales.
I hope the above helps..