What is a Fixed Reorder Point in E-commerce?
A fixed reorder point in e-commerce is a point in the ordering process that triggers a replenishment order. This point is based on the stock level of a particular item and the rate at which the item is selling.
The goal of the reorder point is to ensure that the desired stock level of an item is maintained throughout the ordering process.
Significance of Fixed Reorder Points in E-commerce Supply Chain
Fixed reorder point is an important component of the supply chain that highlights the rate of customer orders. The benefits include the following –
- Data-driven decisions about ordering inventory are more accessible and less stressful with reorder points, as businesses don’t have to start from scratch every time.
- In some cases, reordering too much too soon raises costs and wastes money that might never be recovered. A business supply chain can work more efficiently by balancing the demands of inventory resupply and identifying and implementing a fixed reorder point.
- Fixed reorder points help ensure the business has what they need when needed, eliminating stockouts, back orders, and lost sales.
Prerequisites to Calculate Fixed Reorder Point and How It Works
The prerequisites to calculate fixed reorder point are –
1. Average demand rate: To calculate the fixed reorder point, you must determine the average demand rate for the item or product. This is the average number of units used or sold per unit of time.
2. Lead time: It is the amount of time it takes for a product to be delivered from the supplier. This includes any processing time associated with the order.
3. Safety stock: The extra inventory is kept on hand in case of unexpected demand spikes or delivery delays.
The formula for fixed reorder point –
Reorder point = (average demand rate) × (lead time in days) + safety stock
Use Case With Fixed Reorder Point
Let us assume a small handmade jewelry shop sells ten pieces of jewelry per day on average. They want to maintain a stable inventory for an upcoming exhibition scheduled for five weeks. And the current safety count is 20.
Therefore, using the ROP formula,
Reorder point = [(average demand rate) × (lead time in days)] + safety stock
= (10 x 35) + 20
Thus, when the inventory is below 370 pieces, the jewelry shop will need to replenish its inventory to meet market demand.