Choosing the right quantity of an item to keep up a satisfactory stock level is dependably a challenging task when you start, maintain or run any business.
If you don’t order a sufficient quantity, you risk going with insufficient stock and might not be able to serve a client’s demand. On the other side, buying excess inventory can also result in an unnecessary investment.
Harmonizing this balance isn’t as troublesome as you may think.
A standout amongst the widely acknowledged techniques utilized for maintaining a viable reorder level is the reorder point formula, an institutionalized equation that triggers the framework the moment your stock decreases to the reorder point and puts in a request before you run out of stock.
It is a fundamental formula for any distribution centre since it guarantees that the stock will be renewed in congruence with its demand.
It likewise enables you to diminish your overhead expenses by not investing cash in abundance stock.
Here with this post, we will demonstrate what reorder level is, and what calculation you must use to determine a reorder point.
Why You Need To Calculate A Reorder Level
The primary reason for the reorder point calculation is to recognize when the amount of a specific product has dropped to the point where you have to put in a request with the provider.
This stock level is the minimum quantity that can last until the point the reorder arrives to replenish the next stock level.
Hypothetically, this approach is perfect since it enables you to take care of a client’s demand while investing the least working capital in stock. However, it assumes that demand for an item will be steady and conveyances will dependably arrive on time.
In reality, shipments are here and there late or client demand spikes startlingly. Hence, it’s always savvy to incorporate an additional measure of stock, customarily called safety stock, to shield against these occasions.
Reorder Point Calculation Formula
The critical point here to know about a reorder point is that it is anything but a static number.
It depends on sales and purchase cycles, and it fluctuates based on the product you are selling. But once you have an idea about the pattern in your sales and purchase orders for a specific item, you’re prepared to start assembling all the factors.
The formula is:
Reorder Point = (Delivery Lead Time * Average Daily Unit Sales) + Safety Stock
Delivery Lead Time Calculation
Standard delivery or conveyance lead time is the amount of time it more often than not takes for your shipment of a specific item to arrive.
You’ll need to have a few purchase orders to check the exactness of these numbers, as the conveyance times can vary based on the order delivery time and the quantity of order.
There are a couple of approaches for computing this. However, averaging the data of a previous couple of months can help you with some context. So, let’s place things into viewpoint!
Envision a business in Australia (say Mobile First) that offers mobiles made in the United States. Assume that the provider is dependable in stock and has a distribution centre loaded with mobiles prepared to send immediately.
From that point forward, the mobile order spends an additional three days to load at the port, and from that point, it takes around 15 days to reach Australia from the United States.
Once the shipment arrives, they spend an extra three days in customs, and after that, an additional two days travelling to the vendor distribution centre.
Here we are assuming this as the regular conveyance time for a specific provider.
So, the total lead time is merely adding them up:
3+15+3+2= 23 days of sales
Since it takes Mobile First 23 days to get another shipment of mobiles, they’ll need enough stock close by to cover this 23-day long period of sales offers.
Average Daily Unit Sales Calculation
In any case, knowing the lead time alone isn’t sufficient. You’ll additionally need to figure out the demand amid this period. Assuming Mobile First sells a normal of 14 mobiles every week (14/7 = 2), they’d be selling around two mobiles a day.
So, the lead time demand for Mobile First is (23 x 2 = 46), which means Mobile First will require 46 mobiles to hold them over until the point that their next shipment arrives if nothing surprising happens.
The Need For A Safety Stock
Most of the times, surprising things can happen. This can appear as a sudden surge in demand, mainly due to some remarkable celebrity support, and now, your item is selling quickly. Or maybe your provider’s manufacturing plant has encountered a breakdown, and it’ll take seven days for them to repair the harmed parts and get their plant up and running once again.
Here’s the place safety stock comes into the picture. Safety stock is shield stock you carry as the last guard against unpredictable occasions that can either deplete your stock (demand surge) or unforeseen assembling time (lead time skyrockets due to the supply chain).
You’d like to have enough stock to bring the probability of leaving the stock down to zero. However, it is not possible in the real world. Safety stock is for a stormy day that may never come! So, how would we choose what amount of stock to keep as a backup?
Here’s the formula to calculate safety stock:
Safety Stock = (Maximum Daily Usage * Maximum Lead Time) – (Average Daily Usage * Average Lead Time)
Let’s proceed with the business scenario of Mobile First! On a normal day, they sell two mobiles.
Be that as it may, amid weekends, their sales go up to 5 mobiles. Concerning lead times, their standard lead time is 23 days. However, amid peak season, it can reach up to 32 days.
(5 x 32) – (2 x 23) = 114
This implies that Mobile First needs around 114 units of safety stock to guard against the unseen or peak season.
Subsequently, with 114 units in safety stock, selling around 20 mobiles on a normal week (2 every day on weekdays and five on weekends), Mobile First will have enough stock to last about a month and a half.
Your safety stock can protect you against all possible lead and demand time, furnishing you with enough stock to handle any sudden events. However, if your product is season-based, similar to winter jackets, you’ll need to modify your safety stock level to oblige the peak season demand.
Once the pinnacle seasons pass, it’s a great time to reduce your safety stock levels once more, as more security stock is directly proportional to higher conveying costs. All things considered, individuals are significantly less interested in buying a set of winter jackets amidst the summer season rather than the winter season.
Let’s go back to our initial discussion and calculate Reorder point for Mobile First:
46 (Lead time demand) + 114 (safety stock) = 160
So, once their stock hits 160 mobiles, Mobile First should put in another request with their provider. At 160 mobiles, they’ll have enough to last them as they sit tight for a new stock to arrive (46) while holding enough stock (114) as a cushion against a sudden demand or supply network issues.
Deciding on the reorder points is a significant part of the stock administration. Setting the reorder point to the ideal sum gives you a chance to eliminate excess spending, while at the same time, guaranteeing you’ll have enough stock for your clients even when things take a sudden turn. This makes the life as a shop owner easy and happy.
But how to ensure you have an order placed when stock levels hit the reorder point?
Monitoring the stock you’ve sold each day is simple when you’re beginning with a single store. But once your sales increase across various channels, physically recording each sale can be a very tedious task.
Also, if you keep on adding numbers on a weekly basis, you will definitely miss the reordering point, and this will impact your business. In the long run, it can ruin it permanently.
So, don’t risk and prepare yourself to tackle such obstacles in business.
If missing the reordering point happens frequently, you might need to look into a good inventory management software for your business that keeps track of reorder points.
If maintained with care, it’ll track all your stock development over all the channels, and once your stocks hit the reorder point, the software will alert you to submit another order request. That way, you won’t need to keep a manual eye on your stock with the stock control tool doing the work for you.
Mechanizing your stock procedures implies that everybody wins.
You won’t have to put things on backorder and tell your clients, “Goodness, I’m sad, we’re out of goods, and we can’t get a new item for one more week” and frustrating them. With respect to your clients, they’ll soon realize that you’re a dealer that is always ready to deliver, and now that you’ve won their trust, they’ll generally be returning with more orders.
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