Now that we have decided our order quantity and safety stock we can figure out when to reorder. Inventory can be supplemented in many ways.

For example:

  • Reorder point method
  • Two box method
  • Order interval method
  • Vendor managed inventory (VMI)

In practice these methods are based on order point or order interval. They are just modified and simplified to certain needs.

Reorder point method

Reorder point is based on predetermined stock level when we must place the order. Order can be completely automatic or it can come to manager for modification and for approval. Reorder point method is very simple and fast technique and is therefore easy to automate.

Its weak point is that with exact implementation we will have a lot of deliveries when with a little effort we could compound orders. In quick demand changes reorder point method is slow because it is based for an “old data” and does not take account of new demand.

Reorder point can be computed from the formula DL + B, where D is mean demand, L is lean time and B is safety stock. D and L can be in days, weeks or months but they have to be in same unit.

Simplified this means that reorder point is lean time demand above the safety stock. When we receive and shelve our delivery we should have only safety stock in stock. No less, no more.

Lean time is the whole time from purchase decision to that point when new stock is shelved in stock and ready to be sent for customers. Normally from receiving the delivery to shelving it takes something between hour and couple days depending on the warehouse.

Two box method

Two box method is know from JIT, LEAN and Toyota’s methods. It is mostly used in manufacturing industry where there is two boxes at workstation. When parts are used there is order card at the bottom of the box which is used to make reorder. This method is very simple.

Order interval method

In order interval method the stock is observed at fixed intervals. Example once per week or month. It is practical to monitor stock by ABC categories so that C items are monitored rarely and A items more frequently. It can be also wise to use ABC categories for suppliers and monitor items by suppliers. This way we can minimize our delivery costs. Example items from A supplier are monitored and ordered twice a week, B suppliers once a week and C suppliers every fourth week.

Pros for order interval method is lower delivery costs because of fewer deliveries and therefore ecology too. Frequent stock monitoring is also more capable to react for demand changes. Big con is that this method is very difficult to automate and needs a lot of labor.

When using order interval you should calculate stocks net requirement that takes account of stock in hand, safety stock, orders already made and know and estimated demand.

Net requirement

Net stock = stock in hand – demand + made orders – safety stock

This formula calculates net stock in hand at this moment. You can use estimated and know orders for demand. If net stock is negative it means that new order should be placed or we end up using our safety stock and in worst case use all of it ending up to 0-stock.

Net requirement = – net stock

Vendor managed inventory

Vendor managed inventory is usually based on order interval method where vendor comes to check and supplement stock at certain intervals. In some cases vendor can have access to customers ERP or have camera in stock to be able to see estimated stock.

Usually vendor managed inventory is owned by vendor and is charged by use only. As an simple example this can imagined to be coffee vending machine. Vendor comes twice a week to fulfill the raw materials and collect coins. In factories VMI is mostly used for gloves, goggles, drill bits etc. goods that doesn’t cost much and are consumed a lot.

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Jesse Uitto

Written by Jesse Uitto

Entrepreneur, Purchasing Professional

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