Executive Summary
Executive Summary: Understanding Reorder Point Formula for Inventory Management
In this video, the speaker discusses the concept of reorder point in inventory management, which refers to the point when one should reorder inventory to avoid running out of stock. The speaker breaks down the calculation of the reorder point into two simple formulas: a basic one and a mathematically precise one.
Factors affecting reorder point include safety stock, lead time, strategic inventory planning, shipping charges, and long-term storage fees. The speaker emphasizes the importance of considering these factors when calculating reorder point.
The speaker provides an example of how to calculate reorder point based on a 90-day lead time from China. The formula for calculating reorder point is:
Reorder Point = (Lead Time * Daily Demand) + Safety Stock
The speaker recommends holding 15 days of safety stock to avoid running out of inventory during the order period. Using the example of 60 units per day of demand, the speaker calculates the reorder point to be 6,300 units.
Overall, understanding reorder point is crucial for effective inventory management, and businesses must take into account various factors to calculate an accurate reorder point.
Article: Understanding Reorder Points| A Guide to Inventory Management
Inventory management is a crucial aspect of running a successful business, especially when it comes to selling products on e-commerce platforms like Amazon. One of the most important concepts in inventory management is the reorder point, which determines when a new order needs to be placed to avoid stockouts. In this article, we will discuss the basics of reorder points and how to calculate them, as explained in a transcript by an experienced Amazon seller.
What is a Reorder Point?
A reorder point is the level of inventory at which a new order should be placed to ensure that there is enough stock to meet customer demand. It takes into account the lead time (the time it takes to receive new inventory), demand, and safety stock (the extra inventory held to cover unexpected delays).
Calculating the Reorder Point
There are different ways to calculate the reorder point, depending on the complexity of the business and the level of accuracy required. In the transcript, the seller explains a simple mathematical formula that can be used as a baseline.
The formula for the reorder point is:
Reorder Point = (Lead Time * Daily Demand) + Safety Stock
To illustrate this, let’s assume that we have a lead time of 90 days for a product manufactured in China, and we want to hold 15 days of safety stock. The demand during lead time is 60 units per day.
Using the formula, the reorder point would be:
(60 units per day x 90 days) + 900 (safety stock) = 6300 units
Therefore, the reorder point for this product is when the available inventory hits 6300 units. This means that a new order should be placed before the inventory reaches this level to avoid stockouts.
Factors to Consider in Reorder Point Calculation
While the above formula provides a simple way to calculate the reorder point, there are several other factors that businesses need to consider to ensure optimal inventory management. Some of these include:
Lead time variations: Lead time can vary depending on factors like production time, shipping time, customs clearance, and warehousing time. Therefore, it’s important to have accurate estimates of these variables when calculating the reorder point.
Demand variations: Demand can fluctuate based on seasonality, promotions, and other external factors. Businesses should track demand patterns and adjust their reorder point calculations accordingly.
Safety stock levels: Holding too much safety stock can tie up capital and lead to storage fees, while holding too little can increase the risk of stockouts. Businesses should determine the optimal safety stock levels based on their risk tolerance and inventory turnover rate.
Production and shipping schedules: If a business has multiple suppliers or factories, it may need to coordinate production and shipping schedules to ensure that inventory arrives on time. Businesses should factor in these schedules when calculating the reorder point.
Advanced Reorder Point Methods
The next article and video will address the advanced reorder point method uses statistical probabilities as a method for determining when to make new orders. While this method requires more complex calculations and a deeper understanding of inventory management, it can provide more accurate reorder point estimates and help businesses optimize their inventory levels.
Reorder points are a critical component of inventory management that can help businesses avoid stockouts and maintain optimal inventory levels. By understanding the basics of reorder point calculation and factoring in other relevant variables, businesses can optimize their inventory management and improve their bottom line.