Inventory management includes several tasks and activities that center on a company’s goods for sale. The fill rate represents a company’s ability to meet current demand with inventory on hand. Accountants and managers are typically responsible for determining how much inventory is necessary to have on hand at all times. A stock out occurs when the fill rate exceeds current inventory. This occurs when a business does not have enough products on hand to meet consumer demand.
Many different formulas exist for calculating inventory fill rate. A closely related inventory formula is the safety stock calculation, which represents the stock kept on hand to mitigate or eliminate stock outs. Companies use these technical mathematical formulas to ascertain how the this rate compares to the safety stock calculation. Information pieces needed to complete the safety stock and fill rate formulas include lead time, logistics, inventory turnover, and other data specific to the company’s inventory process. Companies typically compute these formulas on a monthly or quarterly basis.
A basic formula for inventory fill rate is to convert goods sold into a percentage from goods on hand. For example, a company stocks 100 widgets for sale; over the next 30 days, the company sells 73 widgets. The company’s inventory fill rate is 73 percent. Essentially, the formula means very little on its own. That gives rise to the more technical inventory formulas that provide more information on safety stock, logistics, and other factors that impact a company’s inventory process.
Accounting ratios can also play a role in calculating this rate. These include inventory turnover and inventory period. Inventory turnover tells a company how many times each year a company sells through its entire stock of inventory. The basic formula is to divide average inventory into the cost of goods sold; to find average inventory, add the beginning inventory to the ending inventory and divide by two. A high figure indicates the company sells through its inventory several times a year, requiring high stock levels to ensure a good fill rate.
Inventory period is the number of days of inventory currently on hand. This helps a company work its way into the inventory fill rate formula. The inventory period formula is average inventory divided by cost of goods sold, with average inventory being beginning inventory plus ending inventory divided by two. A high ratio indicates a company has several days of inventory on hand for sale. This means that safety stock should be higher.
