This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business. Rich inventory insights like these empower businesses to fine-tune their reorder points and overall inventory management processes. Some inventory management tools also enable businesses to generate customized reports on inventory stock by item, vendor, delivery date, assembly, and more. With this information readily available, inventory managers can avoid wasting time manually searching through spreadsheets and crunching numbers. Software tools can also collect and present data on purchase orders, sales fulfillment, and demand forecasting on a single user dashboard. For example, real-time inventory tracking allows staff to see what’s in stock, what’s on order, and where each item is located. Ī modern inventory management system can bring greater efficiency to inventory processes through automation and digital tools. If your business falls into this category, consider the benefits of inventory management software. If you have at least one procurement cycle and one sales cycle worth of data, you can start using the reorder point formula to improve your inventory operations.īusinesses with a limited number of products can start with excel spreadsheets and format cells to turn red when inventory levels reach the reorder point.įor growing retailers, manufacturers, or wholesalers, working with dozens or hundreds of spreadsheets can be time-consuming and error-prone. How to start using the reorder point formula in your business The manufacturer should hold 132 safety stock units to avoid bottlenecks in production. And let’s assume that the average daily use is 1.5 units, and the average lead time is 12 days. The longest time it would take the supplier to deliver this component is 15 days. Let’s say a manufacturer used 10 units of a component on their busiest day of production. Daily Usage x Maximum Lead Time) – (Average Daily Usage x Average Lead Time) The safety stock calculation is the difference between the maximum daily sales/usage and lead time, and the average daily usage and lead time. Safety stock is the amount of inventory a business holds to mitigate the risk of shortages or stockouts. If your sales cycle is longer or shorter, adjust accordingly. For a reasonable measure, take an average of the past three months of POs for the SKU item you want to set a reorder point for. Average delivery lead time changes with fluctuations in seasonal demand, the quantity ordered, and distance from the up-chain supplier. Over those three months (or 92 days) that averages out to 1.5 units sold on average per day.Īverage delivery lead time is the average amount of time it takes for a shipment to arrive from the time the order was placed. Let’s say you sold 40 units of an item in March, 60 in April, and 46 in May. A retailer would measure the average number of units sold, while a manufacturer would calculate the average number of components used per day. Three months or 90 days is a good starting increment to use. Average daily sales is the average number of units sold or used per day over a defined time period.
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