Understanding Re-Order Point (ROP) in Inventory Management:
Efficient inventory management strikes a balance between avoiding stock outs and
minimizing overstock. A key concept in achieving this balance is the Re-Order Point
(ROP). The ROP tells you the precise inventory level at which you should reorder stock
to maintain seamless operations
ROP Formula:
ROP = (Lead Time Demand) + Safety Stock
1. Lead Time Demand:
This is the amount of inventory you use during the lead time (the time it takes to
receive new stock after placing an order).
Example:
Suppose your business tentative sales 100 units of a product per day.
Lead time (time to receive new stock) is 10 days.
Calculation: Lead Time Demand = 100 units/day × 10 days = 1000 units
2. Safety Stock:
Safety stock is extra inventory kept to cover unexpected demand or delays in delivery.
Here's a simplified way to calculate it:
Formula for Safety Stock: Safety Stock = (Maximum daily demand × Maximum lead
time) - (Average daily demand × Average lead time)
Example:
Maximum daily demand is 120 units.
Maximum lead time is 15 days.
Average daily demand is 100 units.
Average lead time is 10 days.
Calculation: Safety Stock = (120 units/day × 15 days) - (100 units/day × 10 days)
Safety Stock = 1800 units - 1000 units = 800 units
3. Calculating ROP:
Now, using the ROP formula, we can calculate when to reorder.
ROP = Lead Time Demand + Safety Stock
ROP = 1000 units + 800 units = 1800 units
Why is ROP Important?
1. Avoid Stock outs:
By reordering when stock levels reach 1800 units, you reduce the risk of running out
before new inventory arrives.
2. Optimize Inventory Levels:
Calculating safety stock and lead time demand accurately helps maintain the right
balance—avoiding excess inventory and ensuring efficient cash flow.
Best Practices for Stores/Warehouses
1. Timely Material Receipts and Issues
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Ensure that materials received and issued to user departments are recorded on the same day without
any delay. Prompt entries are crucial for maintaining accurate inventory records.
2. Implement 5S Methodology
Regularly remove non-moving items from the store.
Arrange materials systematically for easy access and identification.
Use visual identification tools for better organization and retrieval.
3. Specific Location for Items
Assign a specific location for each item in the store.
Ensure that visual identification systems (e.g., labeling or signage) are in place for quick item
identification.
4. Material Issuance and Entries
Do not issue materials to user departments without recording entries.
Utilize bin cards for manual tracking if immediate entry into the ERP system is not possible. Update the
ERP system promptly afterward.
5. ABC Analysis
Conduct ABC analysis to focus on the critical few items that contribute to 80% of overall consumption.
Use this analysis for effective inventory control and resource allocation.
6. Lead Time Analysis for A Category Items
Monitor the lead time of A-category items at least once every six months.
Calculate lead time as the average duration between the purchase order (PO) date and goods receipt
note (GRN) date, based on the last 5–10 orders.
Update lead time data in the ERP system to enhance procurement planning.
7. Perpetual Stock Counting
Conduct perpetual stock counts by verifying 5–10 A-category items to ensure physical stock matches the
ERP system records.
8. Optimized Storage Practices
Store heavy items on lower racks for safety and ease of handling.
Place lightweight items on higher racks for better space utilization.
9. Regular Reporting
Generate and review key reports regularly, including:
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Monthly Consumption Report
Stock Discrepancy Report
Closing Stock Report
Incoming Quality Report (in collaboration with the Quality department)
Non-Moving Stock Report
10. Inventory Replenishment Systems
For A-category items: Follow scheduled shipments to maintain stock levels.
For B-category items: Use the reorder level (ROL) system to trigger restocking.
For C-category items: Implement a Two-Bin System for effective inventory control.
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