Framework
Optimal Reserve Size Calculation
TL;DR
A calculation framework for determining how much to store, accounting for scarcity duration, consumption rate, and retrieval efficiency buffer.
A calculation framework for determining how much to store, accounting for scarcity duration, consumption rate, and retrieval efficiency buffer.
When to Use Optimal Reserve Size Calculation
When determining target cash reserves, inventory levels, or capacity buffers. Use after deciding TO store (via Storage Decision Matrix).
How to Apply
1
Calculate Scarcity Duration
Determine how long resources will be unavailable
Questions to Ask
- What does historical data show? (average recession length, seasonal patterns)
- What is the worst case scenario?
Outputs
- Scarcity duration in months/years
2
Calculate Consumption Rate
Determine burn rate during scarcity period
Questions to Ask
- What are fixed costs during scarcity?
- What are variable costs at minimum operations?
- What is conservative revenue estimate during scarcity?
Outputs
- Net burn rate per month
3
Calculate Minimum Reserves
Multiply consumption rate by scarcity duration
Outputs
- Minimum = Consumption rate × Scarcity duration
4
Add Retrieval Efficiency Buffer
Select multiplier based on uncertainty level
Questions to Ask
- Low uncertainty (stable business): 1.2-1.3×
- Moderate uncertainty (some volatility): 1.5-1.7×
- High uncertainty (pre-PMF, unpredictable): 2.0-2.5×
Outputs
- Buffer multiplier
5
Calculate Optimal Storage
Apply buffer multiplier to minimum reserves
Outputs
- Optimal reserves = Minimum × Multiplier