What service level results in zero safety stock in reorder point calculations?
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Maintaining proper inventory levels is an elegant dance that must balance consumer demand and supplier reliability. Storing too much inventory eats up your budget in terms of warehousing costs and available capital, but you also need enough inventory to account for unexpected demand or supply problems. Show
How do you strike the middle ground? By calculating reorder points for each product. What is a reorder point (ROP)?The reorder point (ROP) is the minimum inventory or stock level for a specific product that triggers the reordering of more inventory when reached. When calculating the reorder points for different SKUs, the lead time it will take to replenish inventory is factored in to ensure inventory levels don’t reach zero. Setting accurate reorder points allows businesses to avoid having products out of stock while waiting for new inventory. What is the Reorder point formulaThe reorder point formula is as follows: Reorder Point (ROP) = Demand during lead time + safety stock Reorder point formula is the mathematical equation used by businesses to calculate the minimum amount of inventory needed to order more products, to avoid running out of inventory. Why is the reorder point important?Reorder point calculationensures that you don’t fall behind on your next batch of inventory. With an accurate reorder point for each SKU, you’ll always have enough stock on hand to satisfy customer demand — without tying up excess capital in inventory. Minimize costsStoring more inventory than what can be sold in a timely fashion is not a productive use of capital. Reorder points provide businesses with greater financial flexibility by allowing them to keep a minimum amount of inventory on hand without running out of products. Minimize stockoutsToo much inventory is expensive, but too little inventory can result in stockouts, which are harmful for your business: Orders are delayed or canceled, your business loses customers, and your reputation can suffer. Reorder points help prevent stockouts before it’s too late with inventory replenishment. Better forecastingCalculating reorder points goes hand in hand with having a clear idea of purchasing trends over a given time period. The more you calculate ROP for each product, the more accurately you can forecast demand in the future and ensure you use the reorder quantity formula correctly. Reorder point formulaEcommerce businesses can use a simple formula to calculate reorder points for each product. This is the reorder point formula:
How to calculate reorder pointsSo now you know the reorder point formula, but what about demand during lead time? Or what about safety stock? In this section we break down ROP and tell you exactly how to calculate it. Demand during lead timeLead time is the number of days between when you place a purchase order with your manufacturer or supplier for a product and when you receive the product. Your lead time will be longer if your supplier is overseas as compared to a domestic or in-house production facility. To find demand during lead time, just multiply the lead time (in days) for a product by the average number of units sold daily:
Safety stockIt’s not enough to know the average demand for a product, as that demand can increase suddenly or problems with a supplier can prevent you from restocking inventory as quickly as you expected. Safety stock, as the name suggests, is the extra “just in case” inventory you keep on hand to anticipate variability in demand or supply.
To find the proper safety stock level for a given product:
Now, back to our reorder point formula: Just add together the lead time demand and safety stock calculation, and, voila — you’ve calculated ROP. ShipBob keeps reorder points simpleCalculating ROP for each product can be time-consuming and challenging, especially if your inventory is patched together from several suppliers or you sell lots of products. ShipBob’s cutting-edge inventory management software and analytics tools make it easier than ever. Inventory managementShipBob is an order fulfillment solution that features built-in inventory management software, giving you precise control over your inventory. You can check inventory counts at each fulfillment center and set automatic reorder levels, so you are notified when stock is running low.
Demand forecastingWhen you outsource fulfillment to ShipBob, all of your data is centralized in one place: your dashboard. Our software tracks purchasing trends over time to help you with inventory forecasting based on seasonal trends and more.
Insightful reportsShipBob’s platform doesn’t just help with inventory control and forecasting, but generates powerful analytical reports covering all areas of your business. You can get inside the numbers and find new ways to improve supply chain efficiency. ConclusionEstablishing reorder points frees up crucial capital and ensures your business is operating at maximum efficiency across inbound and outbound logistics. The most important and sometimes hardest part of calculating reorder points accurately is that you need reliable data for supply chain planning and provide an accurate picture of customer demand. If the data is off, then the calculation will be inaccurate and you may end up with too much or too little stock.
ShipBob helps ecommerce brands manage inventory, forecast demand, pack orders, reduce shipping costs, and deliver on customer expectations. With a network of fulfillment centers around the United States and technology that’s integrated with the leading ecommerce platforms, ShipBob helps brands improve their shipping strategy. Get pricing below and learn more about why thousands of brands work with ShipBob’s ecommerce fulfillment services. How does service level affect safety stock?The higher the desired service level, the more safety stock is required. The retail industry aims to maintain a typical service level of between 90% and 95%, although this does depend on the product being sold. As mentioned before, a higher service level is a risk as it increases the amount of stock being held.
What does a 95% service level mean?For example, when designing for a 95 percent service level, expect that 50 percent of the time, not all cycle stock will be depleted and safety stock will not be needed. For another 45 percent of cycles, the safety stock will suffice. But in approximately 5 percent of replenishment cycles, expect a stockout.
What is service level in safety stock?A higher service level means more safety stock and a lower service level, saving costs of purchasing safety stock inventory with an increased risk of stock-outs and unsatisfied customers. For instance, using the normal distribution chart, a 90% service level translates to 1.28, 95% is 1.64 and 75% is 0.67.
How does safety stock requirements affect the reorder point?A good reorder point ensures that your business typically does not dip below your safety stock levels and a good safety stock level means that your quantities never hit zero in case the unexpected happens. Therefore, a reorder point is typically a little higher than your safety stock level to factor in the lead time.
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