Whether or not such an investment is worthwhile depends upon your evaluation of various factors such as the expected additional revenue this can bring in from not missing sales, the added costs of the additional inventory, the competitive environment in which the business operates, etc. Always keep in mind that extra inventory is tying up cash that could be used in other parts of the business. Try experimenting with different levels of service and see what numbers you come up with. If the demand and deviation are based off of a weekly forecast then the lead time under the square root would be 2.Īfter you are able to establish a safety stock level you are comfortable with the remainder of the process becomes much easier. 5 because the demand and deviation is on a monthly basis and the lead time is two weeks, or half a month. SS = Desired Service Level x Standard Deviation x Square Root of Lead Time For example a z score of 95% is equal to 1.64, a z score of 90% is 1.29. Find your ideal percent first and the rest is on the left and top part of the table. The secret is work form the inside of the chart out to find your z score number. Check the probability table at the bottom to determine your z score. The desired service level percent must be converted into a "z score". Once you have an idea of your desired service level, standard deviation, and lead time you are almost ready to use the safety stock equation. So if you just placed an order for a new shipment of running shoes, relying on your safety stock levels, you only want to "statistically" run out of inventory before the new shipment arrives one out of twenty times, then your desired level of service would be 95% (5% is 1 out of every 20). The desired level of service can be described as the amount of times you will be out of stock before the new shipment arrives. The equation to develop a safety stock will depend on your desired level of service. and the line labeled R is the reorder point. Same applies to weekly forecast.ĭescription for the image to the right: The red line is your Inventory level over time. If your forecast is in terms of units per month, the standard deviation of demand will be in the same units, and so must the lead-time. If you do not have a statistical software package to do this, you can estimate your amount of variation by approximating how much your demand number might sway during a one-week or one month period (Experiment with different amounts of variation if you don't know your exact number). Virtually all statistical software packages have the necessary built in routines to do this. In order to compute the amount of safety stock you need to know the standard deviation of demand (referred to as demand variation in the excel file). All demands for the product will be satisfied from suppliers (If you order it, they will have it)Īfter these are good to go you must establish a safety stock level.(Other than the products themselves it does not cost you a substantial amount to place an order form suppliers) Lead time (time from ordering to receipt) is constant.Demand for the product is (relatively) constant and uniform throughout the year.Here's a summary of how stores can implement an inventory management system called the Reorder Point Model.īefore using the ROP Model you must make some basic assumptions. This investment will greatly affect your cash flows, and as you know by now cash flows are the pulse that keeps your small business alive. With all that and plenty more, trying to maintain independent inventory levels for an entire store can easily be overlooked or placed on the "oh I'll get to that tomorrow when I have more time" list.Ī large portion of small retailers cash is invested in inventory to sell. On any given day you could be updating a balance sheet, working on advertising, interacting with customers, and constructing employee schedules for the coming weeks. Trying to run a small business is a tricky task that requires owners to be a jack-of-all-trades. This model was initially created for large companies to manage inventory but the same principals can be applied to small retail locations as well. The reorder point model works best with retailers that have available information on their point of sale system. Advanced Inventory Management - Reorder Point Model
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |