Gone are the days when the businessman had to look at their stock and estimate how long it would last by mere instinct and assumption. Then, though it was not quite easy, it was still possible because they dealt with a low volume of goods and services. In the early days of business, businessmen restock when they feel the right time has come i.e by intuition.
Due to advancements in technology, there has been a massive increase in the production of goods and services. The increment in production scale has made it difficult for the ancient method to be achievable. If so, what method can we apply?
When your business experiences more growth through productivity, an effective way to estimate your inventory to prevent stockouts is Reorder Point.
What is Reorder Point
If you own a business, especially an e-commerce store, striking a balance between consumer demand and supplier reliability is something you have to hold with your right hand. Although excess storage of inventory ties down your business capital and incurs additional costs such as warehousing costs. Nevertheless, you need a stock of inventory to meet your customer’s demand.
The question now is, how can you maintain an optimal inventory level for your business?
The answer to the question is what the reorder level aims to achieve. By formulating a reorder point, you have already put a measure in place to combat overproduction, unexpected demand, or supply challenges. Setting a reorder point optimizes inventory, replenishes stock of individual items at the right time, and meets market demand without going out of stock.
Reorder point is the minimum level of inventory of a product in which an order must be generated (automatic or manual) to avoid the rupture of that inventory, also known as out of stock. As a business owner, understanding the market demand and supply for your product has more proven benefits. This will assist you in knowing the best time to replenish your inventory.
For instance, if you restock your product while demand is low, there will be an excess of such products at hand; which will require more holding costs. If you restock your product when the demand is high, you will be able to meet your customer’s demand and produce more sales and profits.
However, it is risky to order when you have little or zero inventory at hand because your sales will be on hold until you receive your order. In a nutshell, reorder points serve as a check against stockouts.
Reorder Point Formula
Now that we know the definition of reorder level, let’s see how to do the calculations. The computation can be done in two ways.
Reorder Point Computation when there is safety stock:
The basic formula for calculating the Reorder Point or Replenishment Level is:
Reorder Point = Demand during delivery time + safety stock
Without Safety stock:
Reorder point = Average Daily Unit Sales x Delivery Lead Time
Average Daily Unit Sales
This refers to the total number of sales divided by the number of periods in which the sales are made.
Alternatively, It is calculated by adding the opening and closing stock then dividing it by two. Average daily sales can also be used interchangeably with average weekly demand.
| Month | Quantity Sold |
| July | 200 |
| August | 300 |
| September | 400 |
For the data above, the average daily unit sales = 900/90days = 10units/month.
Delivery Lead Times
This is the time your supplier needs to process an order and ship the goods to you. It can also refer to the time required to produce the commodity. If you are ordering from more than one supplier at the same time, you will need to take into account the lead times of each, and probably define different order points.
Safety Stock
Safety stock (SS) or buffer stock is a quantity of product to have in stock in addition to the minimum stock which makes it possible to deal with a possible delay in delivery or additional sales during this delivery period. To calculate the safety stock, we will use the data below.
Average weekly sales: 75 jars of butter
Maximum weekly sales: 90 jars of butter
Minimum stock coverage / average delivery time: 2 weeks
The average weekly consumption surplus will be: EMC = 90 – 75 = 15 pots
The safety stock: SS = EMh x number of weekly periods within the delivery time.
SS = 15 x 2 = 30 Pots
Calculate The Reorder Point to Better Manage Inventory
Illustration 1:
Continuing on, by following the above data, the reorder point can be computed as;
The order point: P = (Average weekly demand x number of weeks) + SS
P = (75 x 2) + 30 = 180 pots
Illustration 2:
Let’s look at the following exercise:
A Pharmacy sells an average of 50 bottles of cough syrup daily and the supplier’s delivery time is 10 days once the order is assembled; so the demand during the delivery time will be 500 bottles, and the stock security for our exercise will be 200 bottles.
Applying the formula we obtain:
Reorder Point = Demand during delivery time + safety stock
Reorder Point = 500 jars +200 jars
PR = 700 bottles
This means that when the inventory is reduced to 700 bottles, an order must be placed with the supplier. For this to happen, you must have excellent data quality in such a way that the reliability of your inventory is a very high percentage.
Set a basic reordering reminder in a spreadsheet
With features like conditional formatting in excel, you can set specific cells as the cell with the minimum values to warn you whenever you are running out of stock. In addition, the cells will show red values when they hit a reorder point.
Purchase Inventory Management Software
This is software that controls and automates the management of your purchases and stocks. This software allows you to follow your procurement and inventory management processes and benefit from short and well-known lead times. This is a great tool for an E-commerce business.
Inventory Management with 3rd Party Logistic Company
Third-party logistics (3PL) outsourcing inventory management means that an e-commerce company signs a cooperative relationship with a 3PL outsourcing company in the form of a contract.
Furthermore, the 3PL outsourcing company is responsible for providing warehousing inventory management and logistics services so that goods can reach consumers and provide consumers with quality at the same time, e-commerce companies save unnecessary troubles and losses in the process.
In other words, this is what a 3PL outsourcing company does. Moreover, a good 3PL company can greatly improve the brand competitiveness of e-commerce companies.
Warehousing
Efficient management of logistics takes time and effort, which is why some companies choose to focus their energy elsewhere.
Therefore, working with a 3PL provider means not having to bear the costs of warehousing, structure, and personnel, which translates into short-term savings. Additionally, 3PL providers generally have a network of storage sites, so they make it possible to bring goods closer to the end customer and thus deliver orders more quickly.
3PL companies offer very competitive shipping rates thanks to their diverse customer base and a large volume of merchandise.
Partner with a 3PL Company
Partnering with a third-party logistic company has varieties of advantages and it’s the easiest means to prevent stockouts.
In terms of warehousing and distribution management, self-operated e-commerce companies need to spend a lot of time and labor costs in warehousing and distribution. Sometimes faced with the situation of personnel turnover. It makes them need to spend more time recruiting and cultivating corresponding talents. After handing over to a third-party supply chain management company, these problems can be solved. If the platform does not want to do it, let it be done by a professional person; if the e-commerce company finds it troublesome, let it be done by a professional person.
This can undoubtedly reduce a lot of manpower and time costs for e-commerce companies.
Reorder Point on Demand
Ordering on-demand simply means the order will be made when the people request the product. This type of transaction is widely common in e-commerce.
Inventory Management
3PLs can help companies with; inventory management, including tracking inventory levels, ordering and replenishing inventory, and forecasting future demand, and so on.
In addition, many third-party logistics companies provide built-in inventory management software to simplify or automate this process. Ultimately, good inventory management software allows you to prepare for various needs and sales levels by monitoring trends and historical patterns. All these are done at cheaper fees.
Print Bind Ship: The Best 3PL for eCommerce Stores
Do you need a logistics company that can help you track your business orders? If yes, you are in the right place. At PBS, our team of e-commerce experts will guide you to make a better decision concerning your brand logistics costs.
Our warehouse management system integrates batch management, material correspondence, inventory counting, quality inspection management, virtual warehouse management, and real-time inventory management through functions such as inbound business, outbound business, warehouse allocation, inventory allocation, and virtual warehouse management.
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