A crucial activity for planners is to when to decide to place an order. There are a number of reorder methodologies that can be adopted. Although most computer systems are based on the materials requirement planning (MRP) method, there are other methods that planners can use.
Reorder Point Method
This method is based on the principle that the order has to occur at a specific time when the items will be received just prior to an inventory level which falls below the safety stock level. By this method the safety stock is never broached. For this method to be successful the safety stock level has to be significantly high enough to negate any risk of a stockout, but not be at a level where the cost of carrying the stock is cost prohibitive. The calculation used for the reorder point method is as follows:
- Reorder Point = (Forecasted Daily Use X Lead Time Days) + Safety Stock
There are three scenarios that can occur, the actual demand matches the forecast, the demand exceeds the forecast or the demand is less than the forecast.
When the demand is greater than the forecast there is a risk of stockout or the very least that the safety stock will be partially used. If the actual use of the material is greater than the forecast the reorder point will be reached much sooner than expected, and the safety stock will be depleted.
Depending on the rate of consumption, it is possible that the safety stock will be exhausted before the replenishment order is fulfilled and a stockout could occur. This causes other issues such as determining the forecasted daily use.
If the planner decides that the increase in demand is not an anomaly but the true nature of demand going forward then the forecast will need to be amended to reflect this. This in turn will change the reorder point. The planner also needs to consider raising the safety stock level or reducing the lead time for the replenishment to occur.
When the demand is equal to the forecast the reorder point will be reached and an order proceeded. The ordered material will arrive and be entered into inventory as the material level approaches the safety stock level. Although this scenario is unlikely to always occur, planners aim to have the demand close enough to not cause any major issues.
When the demand is less than forecast the reorder point will not be reached in the time expected. When the order is processed the actual inventory level will not reach safety stock levels before the replenishment order arrives. This will then cause a spike in inventory and there will be associated costs with carrying excessive inventory. Planners can try to delay the order date for the items or delay the receipt of the order.
Time Phased Order Point Method
This method differs from the reorder point method as it allows planners to make amendments for dependant demand, such as sales promotions, seasonal trends and particular customer requirements. The calculation used for this method is as follows;
- Time-Phased Order Point = Independent Demand During Lead Time + Dependent Demand During Lead Time + Safety Stock
Two Bin Technique
This method requires is a manual version of the reorder point technique. The two bin technique requires that there are two bins. The first bin contains a quantity of material that can be used without any replenishment ordering.
The second bin contains the material that is needed during the lead time for the replenishment order plus any safety stock. When the replenishment order is received the material is divided into two quantities for the two bins and the process begins again.
Remember, you should be optimizing your supply chain so that it helps you ship your customers what your customers want. And ship to your customers when your customers want their orders shipped. And get that done by spending as little money as possible. Optimizing when you reorder goes a long way toward accomplishing those goals.
Updated by Gary Marion, Logistics and Supply Chain Expert.