The reorder point also known as replenishment level, is the number of products that must exist in order to request a new order for the same product or make the corresponding purchase. This amount is not convenient, although sometimes experience is applied to make this estimate and common sense.
It is the sum of the demand for delivery time and the presence of security. The optimized calculation mostly incorporates delivery time, quality of service, and demand forecasting.
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Using a quantitative forecast will significantly increase the quality of reorder points in almost all manufacturing and retail business activities.
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In this article you will find:
Reorder Point Capabilities
East reorder point presents a specific agreement regarding the number of units that must exist in inventory to acquire new orders. This means that if there is a delay from the supplier, you should not wait until all units are finished to place the new order.
In this sense, it contains a series of capabilities such as those mentioned below:
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Payment capacity
If the company does not have enough resources to acquire the number of units programmed in the economic first batch, you have to make the decision to order fewer units or get into debt. However, you have to analyze very well which of the two solutions will cost the company the least.
Storage capacity
When the company does not contain the capacity of corresponding storage facilities to accumulate the units of the lot economical, it is in the duty of making a smaller request for units or getting a larger warehouse, either purchased from rented.
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Provider capacity
If the supplier makes discounts for quantities higher than the value of the economic lot or if the supplier does not have sufficient capacity in the delivery of units required by the economic lot, the company has the duty to carry out an analysis of both alternatives so that it can select the cheapest and the one that best suits convenient.
Reorder Point Best Practices
In order to apply this level of inventory in a company, the support of various tools, systems or techniques that benefit the inventory process is needed. In order to adopt this methodology, it is necessary to take into account the following terms:
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- Material or inventory levels, which are available in the warehouse.
- Critical stock levels, that is, the minimum quantity of products that must be kept in the warehouse.
- Maximum and minimum capacity of products that need to be in the warehouse.
Once the company has knowledge of this information, it can begin to incorporate point reorder for your products, in this way you will be able to avoid that your sales decrease and that the customers are dissatisfied.
Most common Reorder Point errors
Putting this system into practice, does not influence the quality of the inventory procedure, since they can be constantly modified mostly through software automation or any other maintenance of existence strategy that manages to represent through practices that can change with the weather.
Large orders that are rare are found in companies that are not up-to-date within their reorder point dynamics. Despite this, the main cause of the problem is not this level of inventory, but the lack of software automation that can constantly update this level.
If the company does not have a reorder point in your inventories, methodologies, systems or tools that control the inventory, a series of consequences and problems may arise such as the following:
- The suspension of production of the company, due to not having the adequate raw materials or they are not sufficient for a correct production of products.
- The dissatisfaction of customers, due to the lack of a good inventory that can meet their needs.
- The considerable economic loss for the company.
- Excessive quantities of products in the company that generate unnecessary expenses.
Quantitative calculation of the Reorder Point demand
The aspects that cannot be understood in the development of inventories are due to the fact that this system can represent a quantitative forecast of demand for a panorama that corresponds to the time of delivery.
In fact, this system constitutes the quantity of inventory that, with a probability of the desired service level, the demand will not be exceeded. In case the demand manages to exceed it, it will reach the situation of lack of existence.
Quantitative vs. extrapolated forecasts at the Reorder Point
Quantitative forecasting models are usually somewhat complex when expressed in writing. As a result, most forecasting software only delivers them on average.
However, the reorder points are essential in qualitative demand forecasts, which means that the most common solution to the lack of quantitative models is to extrapolate the mean forecasts to the quantitative forecasts.
Most of the extrapolation is based on the hypothesis that the forecast error follows a normal distribution.
