When to Replenish Inventory - Order Point

When to Replenish Inventory – Order Point

One of the frequently asked questions our clients ask is “How do I know when to replenish my inventory”? When setting up your inventory replenishment system, there are several factors to consider to help ensure you set your Order Point correctly. Information you will want to consider includes:

SALES – Average sales volume per stock keeping unit (SKU) daily/weekly/monthly/annually including any seasonal variations or peak periods
REPLENISHMENT LEAD TIME – The lead time required to replenish your inventory from the time of placing the order to the time of receiving it and having it ready to sell (consider both the average lead time and maximum lead time)
RISK – What is your customer’s (and your own) risk tolerance for a stock out
1. Is a stock out customer effecting
2. Cost (penalty, lost sales, reputation, etc.)
UNIT COST – The unit cost of your inventory SKU’s including lot size or threshold requirements
SHIPPING COST – The cost to ship product to your warehouse
STORAGE COST – The cost to store inventory including the cost of money
ORDERING COST – The internal cost of placing an order for inventory replenishment
OBSOLESCENCE – Risk of obsolescence. Is product/market stable or susceptible to change?

Order Point

There are numerous inventory replenishment methods that can be used from the most basic to the more complicated. Here we will discuss the Order Point system where an inventory replenishment signal is triggered when the balance on hand reaches a predetermined level.

The amount of inventory you choose to maintain needs to satisfy the current demand, the demand over the replenishment lead time and any unexpected variations (safety stock). The amount of safety stock you choose to keep to buffer unexpected demand or replenishment disruption is typically based on historical averages, forecasts and your own risk tolerance.

Other factors

Other factors or variables may need to be considered before making the decision on the inventory reorder quantity. These may include:

Is there a lot size price break you could take advantage of from your supplier?
Does the cost of storing extra inventory offset the lot size savings?
Do you have the warehouse space for storing more inventory?

Order Point Example

Average daily sales: 20 units
Replenishment lead time: 21 days
Safety stock: 14 days
Order Point: 700 units
Minimum order quantity (MOQ): 420 units

In this scenario, without considering other variables, a replenishment order would be signaled when the inventory first dips below 700 units (21 days of average demand during lead time = 420 units plus safety stock of 14 days = 280 units).

The minimum order quantity would be 420 based upon the expected average demand over the replenishment lead time. Theoretically, another order for 420 would need to be placed about the same time as the first order is received. If demand increases during the order lead time, the next order placed would typically include the MOQ of 420 plus the quantity needed to bring the safety stock back to the desired level.

When to Replenish Inventory – Order Point

When to Replenish Inventory – Order Point

When to Replenish Inventory – Order Point

Order Point

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