Reorder Point: Definition, Benefits, and How to Calculate it
Basically, REORDER POINT is one of the inventory management that has the main purpose of minimizing or pressing the occurrence of out of stock.
By calculating the right reorder point, then you no longer need to worry about the accumulation of goods in the warehouse because it has ordered a lot of too much, or must face consumer disappointment because it runs out of stock.
The good reorder point calculation will make your goods order more smoothly without having to follow worry. Well on this occasion, let’s discuss deeper about the understanding of Reorder Point and how to calculate it.
Understanding Reorder Point is
So, the actual understanding of Reorder Point is a point in which an item in the warehouse must be added to its inventory before experiencing running out of stock. However, the question is when is the best time to order the item?
Most beginner retail businesses only rely on their instincts to increase their product inventory. When they see there are increasing product requests, they will immediately increase the number of products in the warehouse.
Conversely, when there is a small request, then they will not reorder because indeed the inventory in the warehouse is still very much.
For those who already have high flying hours, they will carry out a buildup of dich widow to anticipate the presence of high season or certain seasons, such as Eid, winter, rainy season, or new year.
The principle is simple, the exhausted or whether or not the product of goods is not a problem, because it is important they have fulfilled the sales quota.
Actually, there are still the right ways to calculate the number of items that must be ordered from the supplier, complete with when the most appropriate time to do reorders, the way is to use the REORDER POINT formula.
Problems arising if they don’t know ROP (reorder point)
In the business world, especially in inventory management in the warehouse, ROP has a very important role. If it is not applied properly, it will most likely cause problems that can interfere with the business cycle. Some problems that are likely to occur if not doing ROP properly are as follows.
1. Stock of thinning items, even though high demand
Let’s say you are a leather shoe businessman. It turns out that when you market skin shoe products to the market, the response given by the market is very good. Your skin shoes are selling well and make your shop flooded with orders.
When the condition occurs, you start panicking because you don’t have enough skin shoe stocks in the warehouse. So, making the supply of goods finished, even though the market enthusiasm was very high. As a result, many consumers are disappointed because they cannot get the product.
What’s more, the ordering process and making it takes a long time. So there is a time when the product that is in demand is not available on the market.
When the product is available on the market, the buyer’s interest can fall or no, because consumers can fulfill their needs by making a purchase in another store.
2. Stock the goods are very abundant, even though requests are minimal
Another problem that can occur because it cannot apply Reorder Point is the opposite of the example above. So, let’s say you already have a supply of leather shoes to thousands of units with diverse types and models.
At first you feel optimistic that the item will sell fast, because the market is like your skin shoe products. But when the leather shoes are displayed on the store storefront, it turns out that the buyer is interested in very little because the leather shoes are not trendy anymore.
As a result, your skin shoes, which number thousands only survive in storefronts and warehouses. Losses will increase when storage management is bad and makes the product damaged.
The two cases above are very detrimental to the company. For this reason, ROP has an important role for every businessman. Doing a good ROP calculation will help you make a smooth order of goods without having to suffer losses such as the case example above.
Calculate Reorder Point
There are at least three things that are used as special parameters in calculating reorder points, namely lead time demand, safety stock, and reorder point itself.
1. Lead Time Demand
The lead time is a time lag that occurs between the order time until the item goes into your warehouse. This lead time ranges from several weeks to several months.
The level of lead time will depend on the difficulty of ordered items, the amount, to the distance of delivery of goods. If the supplier is abroad and the items ordered numbered thousands, then prepare to receive the items for several months.
To be easier to understand, let’s use the example case.
Suppose you are an import leather bag seller from China. Let’s say your supplier has never experienced a problem related to stock items and is very ready to send goods at any time. But, for taking and also packing items it takes two days.
After that, your order will be included in a large truck and takes a trip for five days to reach the port. From the port itself, your order will navigate the Pacific Ocean from China to Indonesia which requires the fastest time of 30 days.
Arriving in Indonesia, the item must also be examined again by the customs which takes one week. Then, you can receive the new item in the store by land for 5 days.
Based on the example case above, then your total lead time is a lead time = 2 + 5 + 30 + 7 + 5 = 49 days
The above data explains that you must have a leather bag stock to be sold until the next shipment arrives. You can also anticipate demand from customers on the item. Avoid running out of stock before the items you ordered from the supplier arrived.
However, there are still other ways to calculate this demand, namely by multiplying the number lead time with the average value of your daily sales. Let’s say you can sell 10 leather bags per day, then the lead time your business is lead time demand = lead time x average sales per day, so 49 x 10 = 490.
That means, you must be able to provide 490 leather bags to anticipate your customer’s order until the items sent by your supplier arrive. Even though it sounds easy, but calculations like this can only be done if there are other things that are not suspected.
2. Safety Stock as an anticipation
In inventory management, you must be able to anticipate every worst possibility that can occur and have the opportunity to disturb the inventory of your goods.
For example there are artists who are suddenly interested and use your skin bag, then you experience flooded orders. Or there is another disaster like a hurricane that blows hard from the Pacific Ocean which automatically interferes with the delivery of goods.
These unexpected factors must be able to calculate beforehand by applying safety stock, or better known as additional inventory. But the problem is, how many inventory must be prepared. To find out, you can use the following formula:
Safety Stock = (Highest Daily Sale X Lead Time Oldest) – (Average Daily X Lead Lead Time)
To understand, let’s keep use the business assumption of the skin bag above. From previous data, we already know together that you managed to sell a leather bag of an average of 10 units per day, but on Saturday and Sunday the sale of your skin bags increased to 20 units per day.
For lead time, generally shipping leather bags from China takes 49 days. But because the truck introduces the goods of your goods ordered goods to the port of China experienced truck engine constraints and broke down, then shipments were up to 54 days.
Then, if we use the formula above, then your Safety Stock is (20 x 54) – (49 x 10) = 590
With the existence of these two calculations, we can get the reorder point value by summing the lead time demand and also safety stock. The results of the calculation are as follows:
490 (Lead Time Demand) + 590 (Safety Stock) = 1080 (Reorder Point)
This shows that you have to make an order on the supplier if the rest of the leather bag in the warehouse is a total of 1080 units.
That way, you can make sure your skin bag supply is enough until the next order has arrived. But if there is a disaster or other things that are out of estimate, you still have enough inventory to be able to serve customers without the need to worry.
Calculating Reorder Point is a very important thing in inventory management. But, the main problem is various things that are beyond expectations such as disaster or disasters. If a condition occurs that requires you to be able to update the Safety Stock value, then you must immediately update it.
This will actually be avoided if you use a good inventory management system. If there is a change in data on the Safety Stock or Lead Time due to the increasing number of orders, this system can calculate from time to time automatically.
So, you don’t need to worry anymore with various events where you have to experience stock shortages and also lose consumers.
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