Reordering point and reorder formula
How do you calculate ROP? Do I have a reordering point in MRP software? Do ERP solutions support ROPs?
By definition, reorder point (ROP) is the level of inventory which triggers an action to replenish that particular inventory stock. It is a minimum amount of an item which a firm holds in stock, such that, when the stock falls to this amount, the item must be reordered. (source, of course, Wikipedia https://en.wikipedia.org/wiki/Reorder_point)
As a manufacturer, seller, reseller, distributor, you want to have your items in stock always. When a customer places an order, you want to be able to fulfill that order ASAP.
The best way to always have your stock full is to get inventory management, ERP or MRP software which will take care of that, whether you are manufacturing the finished products, or just reselling them.
ERPAG, as such a solution, will make sure that you always have your items in stock.
ROP in ERPAG is a minimum stock quantity. Once your stock reaches the minimum, the fulfillment will be triggered and you will be able to either generate a purchase order or a work order in a fast few clicks. You can read more about setting up minimum stock quantity in our user manual – https://learn.erpag.com/project/create-new-product-1/untitled-4/basic-definition/quantity-below-minimum
The reorder formula is simple (Lead time x Average Daily Usage) + Stock in case of an emergency aka safety stock.
Lead time is the procurement time. The time that passes by from the day you order the products from your supplier, until he ships them to you and you receive them in your stock. In MRP systems it’s entered as ‘shipping days’ on a product level, from which the expected date is automatically calculated.
Safety stock represents an extra quantity of items that you save in case of an emergency, sudden inflation or tornado (if we are talking about food).
In this equation, Average Daily/Monthly Usage, represents your average sales per day/month or even a year. This is how much you always want to have in your stock. Minimum.
For example, you own a shop – BikeWorld. You place an order to your vendor (1) which accepts it the next day (1). After 2 more days, your order gets processed (2), after 15 days your bikes get transported to your shop (15), and after one more day your items are received to your stock and ready to be sold (1).
This gives you the total Lead time of 20 days = 1 + 1 + 2 + 15 + 1
By this calculation, BikeWorld needs 20 days for full stock replenishment.
To get to your Average Daily/Monthly Usage of products number, simply calculate the average number of sold bikes per day/month. If BikeWorld sells 10 bikes in 5 working days of a week, that means that the average daily sale is 2 bikes = 10 / 5
Safety stock depends on many factors such as seasonal demand, delivery time in case of holidays, etc.
Let’s say that the Safety stock for BikeWorld is 6.
Now, when we have all our numbers, let’s just put them into the equation:
The reordering point for BikeWorld shop is 46. Whenever the bikes hit that number or drop below it, the BikeWorld should replenish their stock by ordering more on time.
You never want to have too much of a product in stock, since they will go to waste if you don’t sell them, and you still have to pay for a storage fee after you already paid for the shipping fee, and basically it’s just ‘frozen money’ which you are not getting back.. Just like that, you don’t want to have your items below the minimum, because, for example, I as a customer will go over to a different store which handles their inventory in a good way and have what I need already in stock, rather than waiting for you to get what I need in a week. You need to find the ‘perfect balance’.
If you run by the YOLO motto (thumbs up if you understood this reference) and you order/produce only after the customer places an order, ERPAG as an ERP/MRP software, still has your back! If you enter a sales order that indicates that you have no quantity or partial quantity in stock, the fulfillment in the purchasing module will be triggered. And, in case you create a sales order for which you don’t have quantity or you have a partial quantity of an item you are manufacturing, the fulfillment under the manufacturing module will be triggered. You can read more about our fulfillment/back ordering options on one of our previous blogs – https://www.erpag.com/news//fulfillment-backorders.html