Why is optimizing inventory important?
For many product based businesses like retailers, E-tailers, wholesalers and manufacturers inventory is your biggest asset. When you have to much inventory it can be a severe strain on cash flow. Furthermore the risk of obsolesce and damage increase. When you have not enough inventory or do not order at the appropriate times you risk loss of sales, costly back orders and production delays.
What is the reorder point?
The reorder point is the level of inventory (quantity on-hand) that indicates the need to issue a purchase order to your vendor (supplier). In general, the reorder point is the lead time demand (i.e. sales and other usage) plus safety stock. The reorder point should result in the receipt of inventory arriving just as the last of the on-hand inventory is used up with safety stock accounting for vendor delays and/or demand spikes.
What is lead time?
The lead time is the number of days from the issuance of a purchase order to the date of the receipt. For example if the purchase order date is September 1 and your receive the inventory on September 15, then lead time is 14 days.
Depending on your integration choice, reorderpoint.com will analyze your purchasing history and calculate lead time for you. Otherwise you can import lead times into reorderpoint.com.
How is demand forecasted?
Demand is forecasted by analyzing historical sales and in the case of manufacturers, usage data. We use statistical methods to determine trends, seasonality and special orders. Based on the type of trend we identify we apply a model i.e. a mathematical equation to calculate lead time demand. The assumption being that the past is a good proxy for the future. If the sales of a certain products show growth, then we assume it will continue to grow until there is evidence to the contrary. Of course we can never know for certain that the future will correlate to the past. Forecasted demand will vary from actual and the variations may be material. However using a systematic approach like reorderpoint.com is vastly better than eying inventory on the shelves or having a gut feeling.
How is seasonality handled?
Seasonality for some of your products may be identified. In retail for example, sales increase during the fall (i.e. the holidays) and decrease in the winter. The human eye can easily identify seasonality but a computer has no eyes so we need to apply statistical methods. In order to be able to identify seasonality we need at least two completes seasonal cycles. When are able to identify a seasonal pattern it greatly enhances forecasting.
How are special orders handled?
Special orders create a unique problem for forecasting because they can affect the model. For example assume you sell on average 100 units per week then you get an order for 1000 units. You can see that this can skew the average. Statisticians call this an outlier. The reorder point methodology relies on placing recurring purchase orders for predictable demand. A special order therefore should be identified and excluded from the model. You then handle special orders aside from your recurring orders.
How do you import data?
Data can be imported in two ways. The first way is set up integration (data feed) between your accounting, ecommerce or ERP software and reorderpoint.com. Once the integration is established data is automatically downloaded in according to the schedule you establish. The second way is through CSV file import which can be used instead of or in conjunction with your integration.