OPERATIONS

How to Plan Reorder Points So You Never Run Out of Stock

Running out is as expensive as overstocking, and both come from not having a reorder point. A reorder point is simply the stock level at which you place the next order. Working it out properly removes most stockouts without increasing inventory much.

InputsLead time, demand
TrapPackaging lead time
BufferSized, not guessed
ReviewWhen inputs change

Why Stockouts Happen

This guide is for supplement, Ayurvedic and herbal brand owners in India.

Stockouts in this category rarely happen because demand surged unexpectedly. They happen because nobody was watching the stock level against the lead time, and by the time someone noticed, there was not enough time to reorder.

A reorder point fixes that. It is the stock level at which the next order must be placed in order to arrive before the current stock runs out. Once set, it turns an attention problem into a simple rule.

The cost of getting this wrong is higher than it looks. A customer who tries to reorder and finds the product unavailable frequently buys a competitor’s product and does not return, so a stockout costs the customer rather than just the sale.

The central question: How much stock do you need on hand to cover the time it takes a new order to arrive, plus a margin for demand being higher than expected?

The Inputs You Need

Four figures.

  1. Your reorder lead time: from placing the order to stock being available to sell, not just to the factory finishing.
  2. Your packaging lead time, if printed components must be ordered first. This is the figure most often forgotten and often the longest.
  3. Your average demand over a period, from actual sales data rather than projections.
  4. Your demand variability: how much a good month differs from an average one.

The Packaging Trap

This is the single most common cause of a stockout in this category.

Brand owners calculate the reorder point against the manufacturer’s production lead time, place the order on schedule, and then discover that printed packaging has its own lead time which has not started yet. The effective lead time is the packaging lead time plus the production lead time, not production alone.

Two practical responses. Calculate the reorder point against the combined lead time. And hold packaging stock separately from product stock, ordering printed components ahead so that production can start as soon as it is scheduled.

Holding packaging rather than finished product also has a shelf life advantage: components do not expire, while product does.

Setting the Buffer

The buffer covers demand being higher than average during the lead time.

Situation Buffer Approach
Stable demand, short lead time Small buffer; the risk window is narrow
Stable demand, long lead time Larger buffer; more time for demand to deviate
Variable demand Buffer sized on the variability, not the average
Seasonal product Buffer against the season, not the annual average
Short shelf life Smaller buffer; accept some stockout risk over write-off risk
New product, no history Conservative on quantity, frequent on reordering

The short shelf life row involves a genuine trade-off. For a product with limited shelf life, a large buffer converts stockout risk into write-off risk, and write-offs are usually the more expensive of the two.

Making It Operational

A reorder point only works if someone acts on it.

Write It Down

Record the reorder point per SKU somewhere visible, with the date it was calculated and the lead times used.

Check on a Schedule

Review stock against reorder points weekly. A monthly check is too slow for most lead times.

Assign an Owner

Someone must be responsible for placing the order when the level is hit, with a named backup.

Recalculate When Inputs Change

A new manufacturer, a new packaging supplier, or growing demand all change the reorder point. It is not a one-time calculation.

Also track stockouts when they occur, with the cause. The pattern usually points to one input being wrong rather than bad luck.

Checklist

Set this up per SKU.

  1. Establish production reorder lead time, to stock being sellable.
  2. Establish packaging lead time separately.
  3. Use the combined figure as your effective lead time.
  4. Calculate average demand from actual sales data.
  5. Assess demand variability.
  6. Set a buffer sized on variability and lead time.
  7. Reduce the buffer where shelf life is short.
  8. Consider holding packaging rather than finished product.
  9. Record the reorder point per SKU with the inputs used.
  10. Review stock against reorder points weekly.
  11. Assign an owner and a backup.
  12. Recalculate when lead times, suppliers or demand change.
  13. Log any stockout with its cause.

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Frequently Asked Questions

What is a reorder point?

The stock level at which the next order must be placed for it to arrive before current stock runs out. It turns stock management from an attention problem into a simple rule checked on a schedule.

What causes most stockouts in this category?

Calculating the reorder point against production lead time alone and forgetting that printed packaging has its own lead time which has not started yet. The effective lead time is packaging plus production.

Should I hold packaging or finished product as buffer?

Packaging is often the better choice, because components do not expire while product does. Holding printed components ahead lets production start as soon as it is scheduled, without the shelf life risk of finished stock.

How large should the buffer be?

Sized on demand variability and lead time length rather than guessed. For products with short shelf life, keep it smaller and accept some stockout risk, because write-offs are usually more expensive than a brief stockout.

How often should reorder points be reviewed?

Check stock against them weekly, since monthly is too slow for most lead times. Recalculate the points themselves whenever lead times, suppliers or demand levels change, since they are not a one-time calculation.

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