An alternative to the Reorder Point (ROP) formula

The Reorder point (ROP) is a specific stock level at which an item (SKU) needs to be replenished. These are the formulas most frequently used to get the value:

Reorder point = ((Average daily usage x Average lead time in days) + Safety stock)

Safety stock = (Maximum daily usage x Maximum lead time in days) – (Average daily usage x Average lead time in days)

So, to simplify: Reorder point = (Maximum daily usage x Maximum lead time in days)

This traditional approach has some inherent shortcomings which can limit its effectiveness. The reorder point formula does not consider:

· replenishment orders already in transit

· rapidly moving demand forecast trends within the purchase order lead time

· demand forecast errors

· required service level

· that safety stock values need to be calculated frequently

An alternative is a reorder date replenishment model that uses a future projected date as the trigger, instead of a physical stock level. Our methodology includes an algorithm that generates optimal daily safety stock levels, which increases the efficacy of reordering and gives a clear inventory projection.

Here are some benefits of the reorder date model:

· Estimated reorder date and days to this date are indicated

· Demand forecast values are checked to confirm that targets are attainable

· Safety stock level is automatically calculated to daily values

· Replenishment orders in transit are included within the calculation

· Forecasted stock level for each day is displayed

· EOQ value is shown graphically to indicate the working stock region

· Service level requirement can be set to a user-defined value for each month

· User-defined demand forecast +/- error value can be set for each month

· An overview is incorporated with each scenario to support the results

· A reorder date stabilization function allows for consistent results

· Uses only relevant demand forecast values to calculate the projection

How do you decide when to reorder inventory? Do you use an established process, or have you modified one for your benefit?