A maximum-minimum inventory control system (max-min) is a system for routine ordering for facilities that eliminates the need for forecasting consumption.
A max-min system is designed so that at the time when orders are routinely placed, stock is near the minimum. Sufficient stock is ordered to reach the maximum.
There are 3 types of max-min inventory control, of which "forced ordering" is the most commonly used. In forced-ordering max-min, at the end of each review period (usually monthly or quarterly) all products are ordered up to the maximum, regardless of the current stock level. In forced ordering, the minimum is not used (but has been calculated).
In a "standard" max-min system, at the end of the review period, only products which are at or below the minimum level are ordered
In a "continuous review" max-min system, products are ordered when they are at or below the minimum.
What must be known is the lead time and the review period (i.e., the desired frequency of ordering) to calculate the max-min levels.
For a forced ordering system, the minimum is equal to the lead time stock and the safety stock, where safety stock is (as a rule of thumb or guideline) greater than or equal to half of a review period. For example, let's say it is desirable to have monthly ordering and it takes 2 weeks for orders to be received, reviewed, filled, shipped, received, and put on the shelf. In that case, the min=2 week lead time stock+2 week safety stock=4 weeks=1 month (max-min is often often expressed as months of stock).
In forced ordering, the max is greater than or equal to min+review period stock. In this case 1+1=2. The max can be greater than 2, but because or transport limits, storage limits, or storage quality at lower levels, it often is not appropriate to go beyond 2.
In a standard system, because products above min are not ordered, it is necessary to hold an additional review period's stock. For example, if 1 is the min and 2 is the max and consumption averages 100 units/month and there are 101 units, the min of 100 has not been reached and no order is placed. Consequently, if this were a standard system, min=2 week lead time stock+2 week safety stock+4 weeks review period stock=8 weeks=2 months. Max is greater than or equal to min+review period=2+1=3.
Each of these choices has pros and cons:
1) Forced-ordering requires ordering every product in the routine re-supply system, consequently it works best in systems with a limited number of products. Even if computers are used to do the math, the facility issuing will issue every product in small quantities, which is time-consuming. The advantage is that data is collected about every product in a well-designed R&R.
2) A continuous review system is dependent only on reaching the min and not all products will do this at the same time, so orders will be frequent if product A hits the min on Monday and product B on Tuesday. Most systems are not able to respond to continuous review for more than a small number of products.
3) A standard system has the most complicated ordering rule, both the end of the review period and at minimum, and, due to the need to hold additional stock, does not work well when review periods are long. It does result in larger quantities being ordered, however.