What are the best practices for setting reorder points and quantities?

2 Calculate Lead Time

Accurately calculating the lead time is essential for setting reorder points. You should consider both the supplier's time to ship the product and the time it takes for it to reach your warehouse. Unanticipated delays can occur, so it's wise to add a buffer to your estimated lead time. This buffer will help protect against stockouts, especially if you rely on suppliers who may have inconsistent delivery times.

3 Safety Stock

Safety stock is a critical component of inventory management. It acts as a protective buffer against unexpected spikes in demand or delays in restocking. To determine the appropriate amount of safety stock, consider the variability in both demand and supply. A higher variability means a greater need for safety stock. However, holding too much can be costly, so aim for a balance that minimizes risk without tying up too much capital.

4 Reorder Quantity

Choosing the right reorder quantity is just as important as setting the reorder point. You need to consider the holding costs of inventory, including storage and insurance, against the ordering costs like shipping and handling. Utilize Economic Order Quantity (EOQ) models to find the most cost-effective order size that minimizes total costs. This quantity should be reviewed regularly to adapt to changes in demand and costs.

5 Inventory Analysis

Regular inventory analysis helps ensure your reorder points and quantities remain effective. Use inventory management software or periodic manual counts to track stock levels and turnover rates. Analyze this data to adjust your parameters as needed. This ongoing analysis will help you respond quickly to changes in the market or your business operations, keeping your inventory management strategy sharp.

6 Continuous Improvement

The best practices for setting reorder points and quantities are not set in stone; they require continuous improvement. Stay informed about changes in the market, your supply chain, and internal business processes. Regularly review and adjust your reorder points and quantities to reflect these changes. Engaging in continuous improvement will help you maintain optimal inventory levels and ensure your business remains agile and responsive to customer needs.

7 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?