There are three standard methods for re-ordering to replenish stock on a timely basis. They are: EOQ, MIN/MAX and FORECAST
EOQ Economic Order Quantity presumes that there is no delay in getting the item quickly from a supplier. Typically one orders the largest quantity possible in order to get the best price reduction. The ideal quantity in such a case is the total ordered the previous 12 months. The system looks at the total sales less returns from the previous 12 months and recommends it as the EOQ. It reduces the amount by the current quantity available.
MIN/MAX Measures current quantity available against minimum quantity on hand established for the item. It makes sure that it does not exceed maximum on hand. If a quantity is determined to be re-ordered, it is padded if less than the minimum order quantity.
Quantity available = on hand less committed to booked orders but not yet shipped plus existing purchase on order. If there is 20 on hand, with 5 committed and 3 on order, the available is 18.
If item has 10 available with a max of 30 and a min of 12, it recommends to order 2. But if the minimum order quantity is 4, it recommends to order 4.
FORECAST Use a sales forecast factor (see below) to establish quantity needed to replace calculated monthly sales. This monthly sales figure is weighted against the lead time and reorder point.
If an item has a lead time of 5 business days and an average monthly sale of 11, it is indicating a need between 2 to 3 a week each month. This is factored against the re-order point. The re-order point should be set to at least 2 as it takes an entire business week to get the merchandise and you need at least 2 each week.
If there is more than two or more available, there is no need to re-order. If there is zero available, then 2 should be immediately re-ordered.
Re-order Factors:
Lead Time how many business days it takes to receive goods after ordering.
Forecast Factor percentage of sales from specified range of previous months sales.
e.g. take 9% of each of the previous 4 months and 8% for the rest of
the 8 months to come up with average monthly sales
Item: ABC123
Month Sales
December 10
November 12
October 9
September 15 = 46
August 2
July 13
June 11
May 28
April
March 10
February 15
January 7 = 86
Total: 132 (9% of 46) = 4.14 (8% of 86) = 6.88
4.14 + 6.88 = 11.02 or a weighted factor of 11 pieces sold per month
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