Definition
The term Reorder point refers to a stage of a supply item which stimulates an action to reload that particular supply of stock.
It indicates the least quantity of a stock item that a firm holds, once the supply of the stock falls below this level based on quantity the firm has to reorder it.
The weight age of reorder point comes into picture when you don’t not lag behind the stock of the next batch of that particular stock item. Your customer is always satisfied as there won’t be a delay in supplying the stock demand.
Importance of Reorder point in a product based business
What would be the importance of stocks for a product based businessman? If a person orders an item or s supply stock while you still have enough of it on hand, it leads to pilling up of the stock, thereby increasing the holding cost of the particular stock.
Consequently if you order when u posses zero stock of that supply, you’ll be deprived of making sales to that particular item till that product supply reaches you. Suppose your competitor has the stock of that supply on hand and makes sales for it in your absence you lose a potential customer.
Hence setting up a planned reorder point helps you optimize the quantity of stock. Refill the stock of every item at the right time, to meet your demand and supply trajectory to work in conjunction, also avoid in going out of stock.
Various methods and Formula’s to calculate reorder point
There are certain terms you need to understand to arrive at a formula to calculate reorder point:
1. Lead time: It is the period(in number of days) taken by your vendor to fill you order
2. Safety Stock: The quantity of extra stock supply that you keep in record in order to avoid stock outs (if any).
3. Daily Average Usage: The total number of sales made (in a day) for a particular stock item.
Reorder Point Formula
In order to arrive at a reorder point there are two approaches with and without safety stock.
§ Calculating ROP( reorder point) with safety stock
§ Calculating ROP without safety stock
Calculating ROP with safety stock
This method is used by businesses that keep extra stock on hand in case of unexpected circumstances. This formative way of keeping stocks in hand allows businesses to calculate reorder point in case of any unanticipated circumstances prevail.
This method allows you to arrive at the ROP taking into account safety stock, daily usage , lead time :
Reorder point = (daily average usage * lead time) + safety stock
Consider an example : if you’re a into a business of selling 300 jars of butter every day , and your vendor takes 1 week to supply each batch of butter that order you placed to him.
In case of any unprecedented circumstances, you keep excess stock enough to manage for 6 days of sales, in case of delay. What should be the ROP?
So here the Lead time= 1 week or 7 days
Safety stock= 6 days*300jars=1800 jars
ROP= (300* 7) +1800=3900 jars
Note: the order for the next batch of butter jars have to be made when there are 3900 jars left in the stock
Calculating ROP without safety stock
Some business just is into time management schemes and strategy that they keep a safety stock. In such cases ROP can be estimated by multiplying your daily sales by you lead time.
ROP = (Daily Average Sales)* Lead Time
Consider the above example of butter jars,
ROP =300*7=2100Jars
Hence you should place an order for the next batch of butter jars when there are 2100 jars left in stock with you
Key take away points
· The proficiency of a stock refilling system has a direct implication on the time required to deliver the stock.
· Between the time span of Ordering a stock and receiving it there is a measure of the stock that is going to be available with you , this measure indicates the efficiency of the stock handling capacity , and also reduce the need for pilling up of extra stocks.
· There by this measure of efficiency in restocking and on hand supply makes a business profitable by reducing the risk of stock out and also by decreasing the holding cost of that supply on over order.
This maintains the supply and demand policy of the business. So the customer is satisfied and leads in flourishing of sales. Also reduces increased cost in stocking additional stock
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