Sum of the lead time demand and safety stock determines the reorder point
The formula is as follows:
(Average daily usage rate x Lead time) + Safety stock=Reorder point
It’s likely that your reorder points will be different for every individual product that you sell – items are likely to have different demand rates and vary in how long it takes to receive the replenishment delivery.
4. Use accurate demand forecasting.
Another way in which you can reduce stock levels and avoid stock outs is through using accurate demand forecasting.
Forecasting demand from reports and historical sales data allows you to order just enough stock to satisfy demand throughout the year and reduces your cost of inventory as you won’t be overstocking or understocking your warehouse.
In addition, predictive data analysis better equips you to make business decisions based on previous months – helping you to estimate the correct size of your inventory.
This way you don’t order too much stock and you don’t risk being too low on inventory.
Closely monitoring your sales trends helps your business to reduce the likelihood of carrying excess stock that you’re unable to sell.
5. Try vendor managed inventory.
Vendor managed inventory (VMI) is when a retailer shares specific data with their supplier, and it is agreed that the supplier maintains an agreed inventory level of a product.
As a retailer, this removes the burden of daily inventory management and product reordering and means that you can focus your efforts on growing your business.
A VMI system ensures that you always have a steady stream of inventory and that your products are always in stock – removing the risk of stock outs.
You no longer need to reorder products at the last minute nor do you need to worry about whether your suppliers have the ability to restock without interrupting your operations.
A vendor managed inventory also goes some way in helping you to reduce stock levels.
As your supplier now manages the resupply lead times, you don’t necessarily need to maintain a large amount of safety stock, leading to cost savings for your business.
6. Implement a Just in Time (JIT) inventory system.
Just in Time (JIT) inventory management is a method for maintaining almost no inventory in your warehouse – ordering everything you need at the moment you need it.
In other words, JIT means having the right products, at the right time and in the right place along with any other materials needed.
It reduces your stock levels as items and materials are only ordered when they are required, rather than months or weeks in advance. This also reduces your cost of inventory.
Ordering inventory on an as-needed basis also means that you don’t need to hold any safety stock and your warehouse operates with continuously low stock levels.
However, while JIT reduces your inventory significantly, it can result in stock-outs.
For example, if there was a sudden and unexpected spike in customer demand for a particular product then you may not be able to fulfill the orders as expected.
Consignment inventory is different from traditional inventory practices in the sense that the supplier retains ownership of the stock until it has been sold to the customer.
In other words, the retailer doesn’t pay for the product until it has been sold.
In turn, this reduces your stock levels and shifts inventory carrying costs from your business to your supplier or manufacturer. It’s a fairly common practice for big-ticket inventory in retail, such as furniture or other large items.
Use of consignment inventory practices can be particularly beneficial to online retailers when customer demand for certain products is uncertain.
On top of this, the retailer takes a much smaller financial risk with consignment inventory as he or she does not pay for the product unless it has been sold.
8. Make use of safety stock.
Stock outs stem from many different factors, including fluctuating customer demand, inaccurate forecasts and variability in lead times.
One way in which you can mitigate the risk of stock outs happening for your business is through maintaining a safety stock level of your inventory.
Safety stock is simply extra inventory that is carried to prevent stock outs.
The correct levels to set depend entirely on your business. Some operations managers will base it off a portion of cycle stock level (e.g. 10% or 20%) while others use hunches.