What Is a Min/max Inventory System?

Cavan Images/Stone/Getty Images

A min/max inventory system is an approach to managing materials or goods in which the business sets a minimum threshold and a maximum level of inventory to hold. When the current supply of an item reaches the minimum level, a new order is placed. When new materials or goods are ordered, the total supply on hand cannot exceed the maximum amount.

The min/max system is the simplest inventory control system to manage, according to Fishbowl. Many companies automate their systems by setting the minimum and maximum levels in a computer. When stock reaches the minimum, an order alert is automatically sent to a vendor or warehouse. The order is then shipped. Companies typically set new order amounts with the supplier ahead of time to ensure compliance with the maximum level.

Some risks exist with the min/max approach. When the minimum level is established too low, it is possible to experience a stockout before a new batch comes in. Customers may get upset if they show up to buy or place an order and have to wait. The business could lose customers, and it is also possible to end up carrying excess stock and having to discount it or throw it away if the maximum level is too high relative to current demand.