How to Best Calculate Reorder Points

Executive Summary

  • This is an introduction to reorder points and how to use the reorder level vs the reorder quantity.
  • The Brightwork ROP calculator sets a dynamic reorder point.

Introduction to Reorder Points

As discussed in this article, reorder level and reorder quantity are both significantly underused in companies and can be set some ways in systems like SAP SNP. You will learn about reorder points and how they are set in production systems.

The Significant of Reorder Points

Reorder level and reorder quantity planning is significantly underestimated. This is because companies so frequently overestimate their ability to effective forecast. Most companies don’t have the capacity to leverage even basic forecasting functionality which is available. This functionality has been available within forecasting applications for years.

Reorder level and reorder quantity work well for both highly forecastable products and products that are difficult to forecast. Any product which received a level forecast assignment using a best fit procedure can have their supply planning emulated by using a reorder point.

By placing a substantial portion of the company’s product database on reordering level and reorder quantity there are several benefits.

  • It saves time.
  • It allows the company to focus on those products that can be improved through forecasting.

The graphic below explains this.

Forecast Error Assignment

Order Point Versus Reorder Point

The term order point is infrequently used. People most often use the term reorder point rather than order point. However, order point and reorder point are the same thing. An order point is a level of inventory where an order is generated. Rather than an order point, a reorder point simply implies that the ordering is perpetual.

The Uses of Dynamic Reorder Level and Reorder Quantity

The beautiful thing about the dynamically reorder point calculation is that it adjusts across the following dimensions:

  • Service level
  • Lead time and forecast error both in variability (for lead time and forecast error) as well as lead time duration.

Dynamic Reorder point analysis can be used for an SKU or any aggregation level. For instance, this form can be used to model the inventory and supply chain of an entire company. Instead of entering the values for a single SKU, the overall or average values can be used.

This allows one to see the relationships between things like service level and the total amount of stock carried. This can also be used to create a service level to inventory curve. An inventory service curve is something which many companies do not have.

It will not, of course, include the total stocking level. So the total stocking level should be estimated and added. Only the reorder point should flex — while the cycle stock should stay the same.

Using Dynamic Reorder Level and Reorder Quantity in Production Systems

As is discussed in this article, reorder points can be set some ways in systems like SAP SNP, ToolsGroup or Demand Works Smoothie.

Most importantly, they can set to work without a forecast or with a forecast.

One of the confusing things about setting up a reorder level and reorder quantity is what to do with the forecast that has been generated for the products that are moved to reorder level and reorder quantity or reorder point. A prediction is still required for things like budgeting. It still makes sense to generate a forecast for them. Another reason for this is that products that are set on reorder point — don’t necessarily stay on reorder point in the future — and vice versa.

The demand history will tell the company when a product should be moved to reorder point planning. It will also tell the company when a product should be moved away from reordering point planning. That is when it is to become an actively forecasting item.

What Makes This Reorder Point Calculator Unique

Most of the reorder point calculators that online calculate a static reorder point typically based upon just lead time, safety stock, stock, and sales. There is no measure of variability in either lead times or the forecast, and it asks the user to input the safety stock as well as the stock. However, variability dramatically changes the safety stock – which is part of the reorder point calculation. Most of these online calculators are not helpful to people need to see the relationships between multiple factors and who don’t have the stock information and require estimates.

The authors seem to have put in the absolute minimum level of work so that they could say their website has a safety stock calculator.

This calculator below does not ask for existing stock or safety stock but does ask for variability. If the variability is not known, then zero standard deviations can be added to the form — to mostly hold those values static.

ROP Formula, or Reorder Point Formula

  • A ROP formula or reorder point formula are all synonyms for the same thing.
  • A ROP formula or reorder point formula are all used to determine the reorder point.
  • The reorder quantity formula shows the amount to be ordered once the reorder point is reached. A reorder quantity formula is often called an economic order quantity.

How the Calculation Form Works

This reorders point calculator provides the intermediate values, along with explanations so that the overall logic of the dynamically reorder point calculator can be fully understood by both students and practitioners.

This form requires input to provide output. However, it also has default values. You can change any input value and the rest of the formula — the output will change immediately. You can continue making changes, and the form will always update without having to press any button or refresh.

Note: For some reason, the drop down field below does not appear to work in Firefox – so if you are using that browser try a different one. Second, when you enter a decimal into the Standard Deviation of Demand and Standard Deviation of Lead Time, you may receive a message “Please enter only digits.” You can ignore that message. The calculator works fine with a decimal point.

To determine the EOQ, see the EOQ calculator see this link.

The Problem: Efficient Calculation and Maintainance of Large Numbers of Inventory Parameters

This calculator shows how to calculate an EOQ interactively on a one on one basis. However, when it comes to managing a large number of product locations a different method of calculating reorder points is necessary. And this not only applies to reorder points but to other inventory parameters as well.

A major part of replenishment is inventory parameters. These parameters include values like safety stock or days of supply, rounding value, reorder point, lot size/economic order quantity and minimum order quantity. Whatever the planning procedure that is used, these parameters control what the supply planning system does.

Testing of the extracted parameters of ERP and external supply planning systems clearly shows that these values are poorly maintained. The result is far worse planning results than could be obtained otherwise.

Being Part of the Solution: Our Evolution of Thinking on Maintaining Reorder Points in ERP or External Planning Systems

Maintaining reorder points in comes with a number of negatives that tend to not be discussed. One issue is that when using supply planning systems like MRP, the reorder points are typically managed on a “one by one” basis. This leads to individual planners entering values without any consideration for how inventory parameters are set across the supply network. We have developed a SaaS application that sets the inventory parameters for supply planning systems externally, and that allows for simulations to be created very quickly. These parameters can then be easily exported and it allows for far more control over the parameters. Supply planning systems are designed to receive parameters, they are not designed to develop the parameters.

In our testing, the approach, which is within the Brightwork Explorer is one of the most effective methods for managing planning in supply planning applications.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

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References

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning