How can you determine reorder points for fast-moving items?

1 What are reorder points?

Reorder points are the inventory levels that trigger a new purchase order for more items. They are calculated based on the expected demand, the lead time (the time between placing and receiving an order), and the safety stock (the extra inventory that protects against unexpected fluctuations). Reorder points help you avoid stockouts, which can damage your customer satisfaction and reputation, as well as overstocking, which can increase your storage and holding costs.

2 How to calculate reorder points?

The basic formula for reorder points is: Reorder point = (Average daily demand x Lead time) + Safety stock This means that you need to order more items when your inventory reaches the level that covers your average sales during the lead time plus some buffer for safety. For example, if you sell 10 units of a product per day, and it takes 5 days to receive an order, and you want to keep 15 units as safety stock, your reorder point is: Reorder point = (10 x 5) + 15 = 65 units This means that you should place an order when your inventory drops to 65 units or below.

3 How to estimate demand and lead time?

To calculate reorder points, you need to have reliable estimates of your demand and lead time. Demand is the number of units that your customers buy from you in a given period. Lead time is the number of days that it takes for your supplier to deliver your order. You can use historical data, sales forecasts, market trends, and seasonal variations to estimate these variables. However, you should also monitor them regularly and update them as needed, since they can change over time due to external factors.

4 How to determine safety stock?

Safety stock is the extra inventory that you keep to prevent stockouts in case of unexpected spikes in demand or delays in delivery. It acts as a cushion that absorbs the uncertainty and variability in your supply chain, though it also adds to your inventory costs and requires more storage space. To determine the optimal amount of safety stock, you should consider the service level (the percentage of orders you want to fulfill without stockouts), the demand variability (the degree of fluctuation in your demand over time), and the lead time variability (the degree of fluctuation in your lead time). One way to calculate safety stock based on these factors is to use the following formula: Safety stock = (Z-score x Standard deviation of demand x Lead time) - (Average demand x Average lead time) . The Z-score is a statistical measure that corresponds to your desired service level, which you can find online or in a table. The standard deviation of demand and average demand/lead time can be calculated using historical data or a spreadsheet.

6 How to measure the effectiveness of your reorder points?

To ensure that your reorder points are working well for your fast-moving items, you need to measure and evaluate their effectiveness regularly. You can use several key performance indicators (KPIs) such as inventory turnover ratio, stockout rate, and inventory carrying cost to assess how well you are managing your inventory. Tracking these KPIs can help you identify the strengths and weaknesses of your reorder points and make adjustments as needed. Additionally, you can compare your KPIs with industry benchmarks and competitors to see how you are performing in comparison. The inventory turnover ratio measures the number of times that you sell and replace your inventory in a given period, while the stockout rate indicates how often you run out of stock and lose sales opportunities. The inventory carrying cost is the total cost of holding and storing your inventory, including rent, utilities, insurance, taxes, depreciation, obsolescence, and opportunity cost. It shows how much money you are spending on maintaining your inventory.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?