Stock Replenishment Considerations
Stock Replenishment is an important factor in any successful business. When to replenish stock and deciding how much to order are two important questions that need to be considered to maintain efficiency and promote growth for your business. This blog will give an overview of things to consider when considering stock replenishment.
When Should I Order New Stock?
Reorder Point = (average demand during the lead time)(lead time) + (safety stock)
As a business owner, you can choose to review your stock on a continuous or periodic cycle. With a continuous review, inventory is constantly monitored and once the amount of inventory reaches a specified reorder point, you place an order. This is ideal for companies with an IT system to help track inventory.
With a periodic review cycle, inventory is monitored at designated times (e.g., daily, weekly, monthly) and at that point, if your inventory level is at, or below, your specified reorder point, an order is placed. For smaller companies, this is may be ideal.
How much should I order?
When deciding how much to order at each reorder point, there are two methods. The first is called Fixed Order Quantity, in which you would order the same amount of inventory every time you place an order. When ordering a fixed quantity, there is a lead time, which has the potential to lead to a stock out. However, you also gain the cost effectiveness through bundled discounts.
The second method is called Order Up-To Level. With this method, you would only order enough to bring your inventory levels up to your designated target level. In this method, the amount you order can vary every time you place an order. Although there is less of a chance of a stock out, as you are always keeping a specific number of inventory on hand, there is also the cost of not being able to get bundled discounts.
Neither review process or order quantity is right for everyone, every time. Business needs vary depending on many factors including desired service level, demand, supply, and supply lead-time. When deciding a review policy, the amount of revenue an item brings to a company should also be considered. The small number of items that account for a large portion of revenue, should have tighter inventory control as they, most likely, have a greater impact on your company’s overall revenue stream. Items that account for a lesser percentage of revenue can be monitored more loosely and do not need as much attention as they do not impact the bottom line of a business as much.
Deciding on the ideal stock replenishment method is a very individualized decision with many factors to consider. For more information on some of these other factors and how Dynamics NAV can help with inventory, check out our resource center or contact the experts at ArcherPoint.