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What are the benefits and drawbacks of using a fixed reorder point system?

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Reorder point is the minimum level of inventory that triggers a new order to replenish stock. It is a crucial concept in inventory management, as it helps to avoid stockouts and overstocking.

However, there are different ways to calculate and apply reorder point, and each has its benefits and drawbacks. These are some best practices to keep in mind when using a fixed reorder point system, which is the simplest and most common method.

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Robert Gartner

Vice President Field Operations

1 What is a fixed reorder point system?

A fixed reorder point system is a method of inventory management that uses a constant value for the reorder point. This means that whenever the inventory level reaches or falls below this value, a new order is placed for a fixed quantity. The reorder point is usually calculated based on the average demand and the lead time, which are the time between placing and receiving an order. The fixed reorder point system is easy to implement and understand, and it works well for stable and predictable demand patterns.

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Robert Gartner

Vice President Field Operations
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Interestingly, retail companies very on a re-ordering process. It would take days to explain this but in a nutshell, it comes down to data and inventory integrity. Integrity is the key. If employees are stealing (62 % of shrinkage) and external them (thief’s and carriers in collaboration with store thief’s) the inventory replenishment system is upside down. If a process, IT data system believes you have 9 of an item, and all 9 have been stolen? It will not re-order.

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2 What are the benefits of a fixed reorder point system?

One of the main benefits of a fixed reorder point system is its simplicity. It does not require complex calculations or frequent adjustments, and it can be automated with a barcode scanner or an inventory management software. It also reduces the risk of stockouts, as it ensures that there is always a safety stock to cover unexpected demand spikes or delays in delivery. Moreover, it can improve customer satisfaction and loyalty , as it enables faster and more reliable order fulfillment.

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Robert Gartner

Vice President Field Operations
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Limited payroll other than theft and inaccurate counts. But operational processes and discipline to weekly adjust counts are critical. These counts also tell a manger where to focus on shrink efforts.

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3 What are the drawbacks of a fixed reorder point system?

Despite its advantages, a fixed reorder point system also has some limitations and challenges. One of them is that it does not account for demand variability or seasonality, which can lead to overstocking or understocking. For example, if the demand suddenly increases or decreases, the reorder point may be too high or too low, resulting in excess inventory or lost sales. Another drawback is that it does not optimize the order quantity or the inventory turnover, which can affect the profitability and cash flow of the business. Furthermore, it may require more frequent ordering and handling, which can increase the operational costs and the risk of human error.

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Robert Gartner

Vice President Field Operations
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See all above. Or system time outs seconds before an associate processes the uploaded count. Failure of routine processes and shrink.

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4 How to implement a fixed reorder point system?

In order to successfully implement a fixed reorder point system, it is essential to first determine the average demand and lead time for each product or category. This can be done by utilizing historical data, forecasts, or industry benchmarks. The reorder point is then calculated by multiplying the average demand by the lead time, and a safety stock can be added to the reorder point to account for any potential demand uncertainty or supply disruptions. This safety stock can be a percentage or a fixed amount of the average demand or the reorder point. Additionally, the order quantity can be calculated by dividing the desired inventory level by the reorder point, or the economic order quantity \(EOQ\) formula can be used to find the optimal order quantity that minimizes the total inventory costs. Lastly, the inventory level must be monitored and a new order should be placed whenever it reaches or falls below the reorder point. This can be done through a physical count, a perpetual inventory system, or an inventory management software.

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5 What are some alternatives to a fixed reorder point system?

When it comes to inventory management, a fixed reorder point system may not be the best option for every business or product. Depending on the demand and supply characteristics, you may want to consider other methods, such as a dynamic reorder point system, which adjusts the reorder point based on the current demand and inventory level, using a demand forecast and a target service level to calculate the reorder point and updating it regularly. Alternatively, a periodic review system reviews the inventory level at fixed intervals and places an order to reach a target inventory level, without using a reorder point, but rather a reorder level, which is the difference between the target and the current inventory level. Lastly, a just-in-time \(JIT\) system minimizes the inventory level by ordering and receiving the exact amount of inventory needed at the right time, using a pull system driven by the actual customer demand. Each of these methods has its own advantages and disadvantages, so it is important to consider the specific needs of your business before making a decision.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the benefits and drawbacks of using a fixed reorder point system?

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1 What is a fixed reorder point system?

2 What are the benefits of a fixed reorder point system?

3 What are the drawbacks of a fixed reorder point system?

4 How to implement a fixed reorder point system?

5 What are some alternatives to a fixed reorder point system?

6 Here’s what else to consider

Inventory Management

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What are the benefits and drawbacks of using a fixed reorder point system?

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1 What is a fixed reorder point system?

2 What are the benefits of a fixed reorder point system?

3 What are the drawbacks of a fixed reorder point system?

4 How to implement a fixed reorder point system?

5 What are some alternatives to a fixed reorder point system?

6 Here’s what else to consider

Inventory Management

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