Ecommerce Inventory Management – When Should I Reorder?
Understanding the Advanced Reorder Point for Inventory Management
Inventory management is a crucial aspect of any business that involves handling and maintaining a stock of products. For individuals and companies that rely on inventory management to keep their business running, knowing the correct time to reorder inventory is essential. In this article, we will discuss the advanced reorder point, a formula that calculates variables to determine the level of safety stock to maintain during the lead time.
What is the Advanced Reorder Point?
The advanced reorder point is a formula that is similar to the basic reorder point formula. The primary difference is that it provides a different method for calculating the level of safety stock during the lead time. This calculation is based on the business’s willingness to run out of stock during the lead time. Essentially, the formula balances the probability of running out of stock against the level of unwillingness to do so.
Understanding Service Level
In inventory management, service level is a term used to describe the probability that the amount of inventory in stock during the lead time is sufficient to meet the expected demand. It is an accepted way to balance the inventory costs associated with holding more safety stock during the lead time versus the business cost of running out of inventory.
For example, a retailer that has a product on a platform such as Amazon, and with a best-seller badge, would not want to run out of inventory. Such a retailer will select a 95% service level on popular items that they do not want to run out of stock. On the other hand, most items will have a 90% service level selected by retail managers worldwide.
Using the Service Level Table
To simplify the calculation of the advanced reorder point, a service level table has been established for inventory managers. Retailers can select the applicable service level value from the table, depending on the products and their ranking. The table provides values for the service factor, a mathematical value that is associated with a user-selected probability of running out of stock during the lead time.
Calculating the Advanced Reorder Point
The advanced reorder point is calculated as follows:
Reorder point = Service factor x Lead time x Daily demand
In the advanced reorder point formula, the service factor and lead time are user-defined values, while the daily demand is the same. The reorder point calculation determines the point that triggers the order of additional inventory.
A Simple Example
Suppose the retailer chooses a 95% service level for a product that sells at an average rate of 38 units per day, and the lead time is 90 days. In that case, the service factor for a 95% service level is 1.645. Therefore, the reorder point will be 1.645 x 90 x 38 = 5626 units.
Conclusion
The advanced reorder point provides a more sophisticated way to determine when to reorder inventory, based on a business’s willingness to run out of stock during the lead time. The service level table simplifies the calculation of the service factor, making it easy for businesses to determine the reorder point. By using advanced reorder point calculations, businesses can optimize inventory management, improve cash flow, and minimize the risk of running out of stock.”
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Run out of stock
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