Have you heard of the order point? Also known as RoP, because of its English name reorder point, this indicator should be monitored closely. After all, it helps to optimize storage and acts as a “trigger” to indicate the need to replenish goods.
What is reorder point?
Managers need to always be aware of inventory levels. They cannot be below average, as this could result in orders not being fulfilled, but it is also necessary to avoid stockout. In other words, stock shortages.
A simple and effective way is to make the order point. It indicates the ideal time to issue the purchase order, which is based on the minimum quantity that the business can operate in case of unforeseen events.
In companies with greater inventory management, this process is often automatic: when an item reaches a certain quantity, the system sends an order to the Sales department. This way, the product in question is not out of stock and there is no loss of sales. On the other hand, there is no excess of items — a problem that can occur if an inventory is not carried out periodically.
How to calculate the reorder point?
Fortunately, there is a simple way to understand the order point. Its objective is to achieve a balance between the cost of investing in the merchandise and the risk of stockout. Therefore, the formula used is:
Reorder point = safety stock + (average consumption x lead time)
Which leads us to explain other concepts linked to this indicator:
• Safety stock: It is the minimum number of items to avoid disruptions. In other words: the quantity of products required to avoid stock shortages due to demand variability and uncertainty regarding replenishment.
• Average consumption: Daily average by which that commodity is consumed. Use a WMS system to monitor the flow of items and be able to calculate this indicator.
• Lead Time: Total period between the order placed by the customer until the item is shipped to the consumer. Many companies are investing in intralogistics to improve this indicator, as it means optimizing processes and reducing waste.
With these concepts, we can move on to an example.
Let's imagine that your company sells kitchen products, such as pans. Each day, 500 items are sold and the supplier takes 7 days to send new shipments to the warehouse. If the minimum stock is 2,000, order point is calculated as follows:
Order point = 2000 + (500 x 7) = 2000 + 3500 = 5500.
So, in this example, every time the stock reaches five thousand five hundred units of pans, it is necessary to contact the supplier. In addition to making this calculation, it is interesting to monitor the organization and capacity of the warehouse. If it is getting empty, it may be an indication that it is time to place a new order.
Have a automated warehouse helps at these times, as it makes it easier to have an overview of what is happening. Many managers do not know when to make this decision — if this is your case, Click here to find out if your company is ready to automate logistics processes.
