Running a business call for strong knowledge of business, alertness, honesty, analytical skills but most of all; time sense and foresight to make accurate and timely decisions.
It is observed that businessmen find difficulty in predicting the right quantity of stock they must have to avoid the situation of out-of-stock/ low-stock in the future. Inventory management is a challenging task but also one of the recurring reasons behind the business failure. Organizations can reduce this pressure either by strengthening their manual process which involves timely analysis of stock and sales or by the implementation of inventory software.
Keeping a sufficient quantity of raw material/ product ensure good client relations as serving the client on time is one of the best ways to delight a client. On the other side, keeping the excess inventory in storage can also result in losses. Both the cases of over-stocking & out-of-stock occur because of poor or no planning. However, harmonizing this balance is not rocket science.
Why the calculation of Reorder Level is imperative?
The most widely acknowledged and trusted technique that diminishes all the possibilities of losses due to understocking or over-stocking is maintaining a viable reorder level, and this technique is based on the reorder point formula, an equation that intimates you whenever there comes a situation of decreased stock so you could make a purchase order before you run out of stock. It analyses the demand for product time-to-time and intimates you whenever the stock goes down i.e., the stock is renewed in congruence with its demand.
The prime focus of the reorder point formula is to ensure that a specific amount of product is always available to fulfill customer demands and the purchaser puts a reorder to the supplier whenever inventory or raw material level goes down for effective inventory management.
Reorder Point Calculation Formula
Calculation of the re-order point formula is proportional to the demand, sales, and purchase of the product you are selling. It does not give any static value but identifies the point of time the purchaser can raise a purchase order for the timely availability of material.
Reorder Point = (Delivery Lead Time * Average Daily Unit Sales) + Safety Stock
The Need For A Safety Stock
Once in a while, a surprising situation arises when the demand for a product increases exponentially. This can be due to several reasons like the decline in the product quantity/ quality by the competitor, a sudden increase in the price of a similar product, exceptional promotion of the product by marketing dept., availability of discounts or schemes. Under these phenomenal circumstances, it becomes quintessential to keep safety stock to keep the business running. Safety stock acts as a buffer in case the sales of an item are greater than planned and/or the company’s supplier is unable to deliver additional units at the expected time.
Using certain formulas reduces the possibility of a stock down to a greater extent. However, the risk is always there. It’s hard to never miss on the reorder points. In the real world, it’s not possible to keep a manual track of sales and purchase. So, it is always a good decision to involve technology and implement inventory management software for managing your inventory like a pro.