Has there ever been a situation when you couldn't figure out when to re-stock your items, especially when they are flying off the shelf? Such faux pas can put your business in a fix, and re-ordering items on a large scale mean appropriate time management. This is where the re-order point formula calculator comes in handy; you can maintain a healthy amount of safety stock without affecting your order delivery timing. Thus, keeping the customers contented and the supply chain activities.
What is Re-order Point?
In simple words, whenever an item is about to be replenished from current stock, it is known to be a re-order point. This means that the particular item will cease for delivery, making the sold-out tag a reality in the market. To prevent this catastrophe, the product must be re-ordered to keep the demand in tandem with the supply. There is never a time lag between re-ordering the items and the inventory dropping to zero in the real-time factor.
There are always two factors that determine the re-ordering point of the stock. One is the difference between the dates of order in correlation to the receipt of the inventory ordered. And the second point is the amount of safety stock present to deal with the fluctuations of demand in the market. Hence re-order point is equal to average consumption during lead time plus the safety stock.
How to calculate Re-order Point?
It all depends on the stipulated demand of the items in the market; this can vary with every single product. For example, a particular brand of soap may be famous than another brand. Hence an eCommerce company might re-order that well-liked brand regularly. If there is a supplier who can re-stock the item within one day, the company will invest more money in instant supply. Whereas for the not-so-popular brand, the e-commerce company will set the thing for re-stocking from a supplier who delivers in three days.
To calculate the re-order point, the company must keep a fresh eye on the average sale of the items every day. However, this cannot determine the exact amount of stock available since the demand may increase or drop with the market's mood. To avoid this confusion, the company has an advance stock in hand. This is known as the safety stock. Hence the calculation for the correct re-order point is:
Average daily usage rate x lead time + safety stock
This formula works typically since the order will be re-stocked sooner by a quality supplier before the stock reaches a zero point.
Re-Order Point Formula
The main point to figure out the re-order point formula to make it work is by calculating the delay or the lead time. For example, an e-commerce outlet is smart enough to analyze the average daily consumption of an item. It even has a high success rate of maintaining the safety stock. Yet, if the supplier of the given product fails to deliver the re-ordered amount in the stipulated time, this leads to business loss. This usually happens when the items are being re-stocked from worldwide suppliers; these products take massive transit time and get stuck in customs. Thus this waiting period of the item shipped from the supplier to the e-commerce warehouse is the lead time.
That is why whenever the re-order point formula has to be planned right, it has to be considered as:
Lead time demand = Lead time x Average daily usage
How to Find Re-order Point?
Now that you can determine the lead time and the safety stock, it is easy to find the re-order point. The lead time allows you to keep the customers satisfied with their demands without compromising the supply chain. The safety net is gained with the stock remaining in your warehouse to compensate for a surge of deliveries. The right time to hit for a re-order is when the average stock levels hit the total pending emergency supply.
Besides these factors, it is also essential to know the tide of the market; the e-commerce unit must be able to predict the mood of the customers before re-ordering any item. It also depends on the occasion and season; sales of essentials go up during the festive season. The trends of the market ebb change with the weather; some items are seasonal while some sell all year round. Depending on all these stated predictions, the re-order point can be estimated.
What Is The Re-Order Point Inventory?
As a successful business outlet, one has to plan accordingly on when to stock. If you have a lot of safety stock and still go ahead refueling the current stockpile, this will lead to escalated holding costs. Thus, when the demand drops for a specific item, you will have unused goods in your warehouse, leading to tremendous loss. If you order after the stocks have replenished, your sales will diminish, and you will lose out on customers since you will be waiting for the supplier to deliver the items. For this reason, it is essential to have a sorted-out re-order point inventory.
Different vendors have a varied network to deliver out-of-stock items. Hence it is crucial to understand their lead timings. Having an optimal inventory for everything is the ideal way to keep a check on the re-order point.
There is no magic formula to predict the trends and jumps in the market; to become an unbeaten competitive force in business, one needs to keep track of all the goods moving out of the warehouse. Timely inventory checks, unpiling of stocks, and daily calculation of products selling fast are the only way to beat the lead time. With re-order point estimations, one can achieve a flawless system of contributing towards customer satisfaction.