Inventory management is an important aspect of retail strategy. For example, it is important to know when it is time to reorder and how much to order at a time. This is the reorder point.
As consumers buy a product day after day, the inventory level declines. The question for retailers is how low they should allow the inventory level to decline before they place an order, that is, when is it time to reorder? If you order too late, you take a chance of losing sales because you are out of stock.
If you order too soon, consumer tastes may change and you will be stuck with excess and unsellable merchandise. The decision of when to order and how much to order is critical to a retailer's bottom line. The simplest formula to determine the reorder point is Reorder point Usage Rate Lead Time But, of course, a retailer can't exactly estimate the usage rate, so it needs to keep some "safety stock" on hand.
Then the formula becomes Reorder point (Usage Rate Lead Time) Safety Stock The Healthy Day Organic Food Store sells 20 containers of yogurt a day. It takes 6 days to place an order and receive a new shipment of yogurt.
But to be prepared for the possibility of extra sales or a late shipment, they need to have a safety stock equal to three days' sales. What is the reorder point for yogurt for Healthy Day Organic Food Store?