Determining inventory reserve level

One way to determine proper inventory levels is to segregate inventory into classes, based the number of times a unit turns (is used or sold) over a period of time, such as a month or year. For this explanation, let's label these classes as A, B, D and D.

Inventory in the A class have the highest turn rate and an adequate supply should be kept in stock and in transit to meet the regular and historically predictable demand. This is the only class that you should be guilty of over-stocking. The B class items turn slightly slower and consequently, should have a correspondingly lower stocking rate and incoming restocking schedule.

Items in the C class have a slow turn rate, should be stocked barely beyond the floor stock or demonstration models, but still should have a restocking schedule. The D items have the lowest turn rate and should never spend the night under your roof unless it is already paid for by a customer. The best strategy for the C and D classes of inventory should be heavy on quick-ship for one or two day delivery instead of stocking.