“When to replenish is more important than how much to replenish”. The key to determining “when to replenish” is to determine the “reorder point”. The reorder point is a numerical value. Under ideal conditions, once the inventory level of a product is lower than the reorder point, the purchase of the product will be triggered. In other words, the reorder point is a dangerous threshold. When the inventory level is lower than this threshold, there will be a risk of out-of-stock if it is not replenished.
The calculation formula for the reorder point is as follows.
Reorder point = estimated shipment volume in the delivery cycle + safety stock
We calculate step by step.
Step 1: Calculate the estimated shipment volume in the delivery cycle.
Estimated shipment volume in the delivery cycle = delivery cycle x sales rate
For product A, the sales rate in the past 30 days is 9.8 pieces per day, and the delivery cycle is 65 days.
Substitute into the formula, then the estimated shipment volume of product A in the delivery cycle = 637 pieces.
Step 2: Calculate the safety stock.
Safety stock = estimated shipments in the delivery cycle x safety stock ratio
For product A, the estimated shipments in the delivery cycle are 637 pieces, and the safety stock ratio is 25%.
Substitute the formula, and the safety stock of product A = 159 pieces.
Step 3: Calculate the replenishment point.
Add the estimated shipments in the delivery cycle and the safety stock to get the replenishment point: 637+159=796 pieces.
Step 4: Calculate the replenishment time point.
With the replenishment point data, the replenishment time point can be further calculated. The formula is as follows.
Replenishment time point = (existing inventory-replenishment point)/sales rate
For product A, the above data is substituted into the formula to get: (537-796)/9.8=-26 days. The final result is a negative number, which means that under the premise of a 65-day lead time, product A should have been restocked 26 days ago! We have missed the best time to restock product A.