41. How to calculate the reset point

Efficient inventory management is essential to the success of any business that deals with physical products. One of the fundamental aspects of inventory management is determining the reorder point, which is the stock level at which a replenishment order must be placed. Accurately calculating the reorder point can help prevent stock-outs, overstocks, and lost sales. The purpose of this chapter is to explain how to calculate the reset point.

First of all, it is important to understand what the reset point is. The reorder point is the inventory level that triggers an alert to replenish or reorder the product. It's a sign that inventory is reaching a critical level where it soon won't be enough to meet customer demand.

The replenishment point calculation is based on three main factors: daily demand, delivery time and safety stock. The formula for calculating the replenishment point is: Replenishment Point = (Daily Demand x Delivery Time) + Safety Stock.

Daily Demand is the average quantity of a product that your customers buy in a day. This can be calculated by adding up the total quantity of a product sold in a period of time (e.g. a month) and dividing by the number of days in that period. For example, if you sold 600 units of a product in a 30-day month, your daily demand would be 20 units per day.

Lead Time is the number of days it takes to receive a replenishment order from the supplier. This may vary depending on the supplier and product. For example, if the delivery time for a product is 5 days, that means it will take 5 days from the time you place the order to the time the product is delivered and ready to be sold.

Safety Stock is an extra amount of stock you keep to protect against unexpected changes in demand or delays in delivery. Safety stock can be calculated in several ways, but a common approach is to use a percentage of daily demand. For example, if daily demand is 20 units and you decide to maintain a 25% safety stock, your safety stock would be 5 units.

Using the formula above, if the daily demand is 20 units, the delivery time is 5 days and the safety stock is 5 units, the reorder point would be: (20 x 5) + 5 = 105 units. This means that when the inventory level for that product drops to 105 units, it's time to place a restock order.

It is important to note that the reset point calculation is an estimate and may not be perfect. Demand may vary from day to day and delivery time may change. Therefore, it is important to regularly monitor the stock level and adjust the reorder point as necessary. It may also be useful to use an inventory management system that can automatically calculate the reorder point and send alerts when the stock level is approaching that point.

In summary, reorder point is a valuable tool to help manage inventory effectively. By calculating your reorder point accurately, you can ensure you always have enough stock to meet customer demand without holding more stock than necessary.

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