Safety Stock and Reorder Point: Calculation
- 1. Safety Stock & Reorder Point By: Aatif Razi
- 2. Table of contents 01 04 02 05 03 06 Introduction Safety Stock Reorder Point Importance Calculation Reorder Point Strategies
- 3. Introduction Safety stock is extra inventory kept on hand so products are always available to fulfill customer orders. Basically, it’s a buffer to minimize stockouts, keep customers happy and build trust in your brand. The Reorder Point (ROP) is the inventory level at which a new order should be placed to replenish stock before it runs out. It is calculated based on lead time, demand and safety stock.
- 4. Why are these Important? v Demand Variability Customer demand is rarely consistent—unexpected spikes can lead to shortages. Example: A retail store selling umbrellas sees sudden demand surges during unexpected heavy rain. v Supply Chain Disruptions Supplier delays, transportation issues, or production stoppages can impact inventory flow. Example: A global chip shortage can delay smartphone production. v Lead Time Fluctuations The time between placing an order and receiving stock can vary due to unpredictable logistics issues. Example: A shipment from overseas is delayed due to port congestion.
- 5. Common Misconceptions About Safety Stock �“More safety stock is always better.” ✔ ️While safety stock prevents stockouts, excess inventory leads to higher holding costs and waste. �“A fixed safety stock level works all year.” ✔ ️Safety stock should be dynamically adjusted based on seasonality, demand trends, and lead time variations. �“Only large businesses need safety stock.” ✔ ️Even small businesses benefit from safety stock to maintain service levels and avoid lost sales.
- 6. How to calculate Safety stock & Reorder point Safety Stock = Average Sales X No. of safety days Reorder Point = Safety Stock + Average Sales × Lead time v Average sales: average daily demand (qty/day) v Lead time : The time, in days, it takes for your supplier to deliver the ordered items after you place an order.
- 7. Example : Lets say you have an average sale of 100 quantities per day for a product with an average lead time of 10 days. From experience, you know that owning 5 days of supplies is enough to mitigate supply and demand risks. Average Sales = 100 qty/day Lead Time = 10 days No. of Safety days = 5 days Safety Stock = Average Sales X No. of safety days = 100 x 5 = 500 qty Reorder Point = Safety Stock + Average Sales × Lead time = 500 + 100 x 10 = 1500 qty
- 8. Safety Stock using Average – Max method v Maximum daily sales. The highest number of units you sell in a day, based on past sales data. v Maximum lead times. The maximum lead time you anticipate during the reorder process combines supplier lead times (the amount of time, in days, it takes a supplier to fulfill your order) with delivery lead time (the amount of time, in days, needed for the order to travel from your supplier to you). v Average daily sales. Calculate average daily demand (or average daily unit sales) by reviewing sales order history: Divide the number of orders by the number of days in your accounting period. v Average lead time. This combines the average lead time of your suppliers with the average delivery lead time once your supplier ships the goods. Safety stock = (maximum daily sales x maximum lead time) – (average daily sales x average lead time)
- 9. Reorder Point Calculation Strategies Periodic reorder point planning 1 2 3 4 5 Fixed Reorder Point Planning ABC Analysis Just-in-Time Min/Max reorder point planning
- 10. 1. Fixed Reorder Point Planning v Simplest model v Both the order period and the order quantity are fixed e.g. you order 200 items every 3 weeks. v Works best when demand and lead time are consistent.
- 11. 2. Min / Max Reorder Point Planning v Stock levels are tracked and reordering is triggered when inventory drops to the reorder point, regardless of frequency. v Used when demand is highly variable over time. v The reorder quantity is a fixed amount.
- 12. 3. Periodic Reorder Point Planning v An order is placed when you reach a specific date in a fixed order cycle. v The variable order quantity is calculated so that stock is replenished back up to the target stock level e.g. you order every two weeks and the amount you order varies every time so stock levels stay the same. v Again, this model is only effective if demand is fairly constant.
- 13. 4. Just-in-Time (JIT) It aligns raw-material orders from suppliers directly with production schedules. Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately.
- 14. 5. ABC Analysis ABC analysis is an inventory management technique that categorizes items based on their value and importance, focusing resources on the most valuable items (A-items) while allocating less attention to lower-value items (B and C-items).
- 15. Benefits of effective Optimization Techniques Ø For starters, your finance team will be pleased to see your overall inventory turnover improve and inventory levels drop, releasing working capital to be used elsewhere in the business. Ø Secondly, your sales team will be happier knowing you can guarantee higher levels of stock availability. Ø Finally, your supply chain will be more agile, as you’ll always have the inventory you need in the right place at the right time.
- 16. Safety Stock = the emergency buffer. Reorder Point = the trigger to place an order. Summary
- 17. “The more inventory a company has, the less likely they will have what they need.” Taicho Ohno a Japanese industrial engineer and businessman When companies carry too much stock, they become less responsive and less efficient. They may have a lot of the wrong items and still lack whats actually needed at the moment.
- 19. THANK YOU FOR YOUR ATTENTION