Net Stock Calculation
Net stock is the net difference between inbound and outbound inventory at a warehouse location. The net stock calculation, therefore, is the formula used to calculate the actual net stock. Net stock is important in determining when to order a product from a supplier or perhaps when it might be time to return product that isn’t selling.
Before jumping into the formula, let’s understand a few terms that are used in the calculation:
- Quantity on Hand — this is just what it sounds like: the amount of a product physically in the building.
- Quantity Allocated — this is the quantity of the product associated with current customer orders, stock transfers to another warehouse, product returns, or tied up in some other way that makes it unavailable to sell.
- Quantity Backordered — this is the quantity committed to customer orders that isn’t currently available.
- Quantity Due In — this includes purchase orders coming in from a supplier, transfers coming in from another warehouse, or product returns that are unprocessed.
The above terms can be broken down into subcategories that allow for more granular tracking, but for our purposes these are the critical terms.
In general, the net stock calculation is expressed as follows:
Net Stock = [Quantity On Hand] - [Quantity Allocated] - [Quantity Backordered] + [Quantity Due In]
Most inventory management systems, even the most basic ones, will allow an inventory manager to see this type of information for each item.
Let’s look at some real numbers for a product to see how the net stock calculation is applied for a standard disinfectant towel (a hot commodity these days). We’ll assume all quantities are in cases. It’s important that the unit of measure be consistent to give accurate results.
- Quantity on Hand = 105
- Quantity Allocated = 105 (can’t allocate more than we have)
- Quantity Backordered = 57
- Quantity Due In = 1,260
Net Stock = 105 - 105 - 57 + 1260 = 1,203
Now, let’s look at a few examples of the importance of knowing the net stock:
- Suppose you are the inventory manager for a particular widget. You placed a large order in anticipation of a promotion. You’re now out of the item and have open backorders. Looking at the quantity due in, you see that you have more than enough to cover all outstanding orders, plus enough for the next two replenishment cycles. Therefore, you know you don’t need to place another order yet.
- With the promotion period ended on the widget from the previous example, you see that customers stopped buying the product after one month on promotion. Consequently, you have excess inventory based on the current forecast. You now know you should return the excess inventory to the supplier before it becomes ineligible for return.
While those are some basic examples, they illustrate two aspects of why understanding net stock is so important. In the inventory forecasting section of Take Stock, you’ll see myriad ways that the net stock calculation is used alongside forecasting calculations to determine when to purchase inventory and how much to buy.
Thanks for reading! As always, if you have specific questions, please leave a comment and I’ll get back to you.