Step by Step Guide to Optimising Inventory Purchasing
- Optimising inventory purchasing
- Calculation of optimal reorder points
- Benefits of automating inventory purchasing
- Next steps
“This product’s sold out” is a phrase that no-one wants to hear – whether you’re the customer or the seller! Often stockouts are caused by insufficient inventory management practices including inaccurate demand forecasts, poor stock control management or incorrect replenishment strategies. In particular, effective inventory purchasing can make or break profits. In this blog, we’ll break down the 7 steps you should take for optimising inventory purchasing practices.
Optimising inventory purchasing
Let’s start with reorder management. In a perfect world, all reorder quantities are directly tied to real-time customer demand. Demand needs to be strategically analysed to ensure accurate replenishment. There are 3 common ways to organise product replenishment, depending on the need and product type. They are the:
- Order pattern method – making consistent purchases of a fixed amount
- Reorder point process method – reordering stock when it falls below a certain level
- Control rhythm method – checking inventory at fixed intervals and adjusting ordering
Companies with complex product offerings can find themselves using all three methods, depending on their needs at the time. This can create a big headache for buyers, not to mention increases the margin of error when reordering. To fix this lets take a look at a few specific examples of how to calculate the optimal replenishment point, based on existing datasets.
Calculation of optimal reorder points
Let’s get back to basics. Sales rate and delivery time are necessities for calculating the optimal reorder amount. For example, if a product is expected at time T and the delivery time is , the order should be placed at the time T–. When the supply is accurately delivered at time T, it saves storage costs. However, if an order is submitted too late causing the shipment to arrive after time T, an unprofitable backlog occurs and, put simply, you lose customers. How can the reorder point be identified depending on remaining inventory?
Two cases must be distinguished:
- The delivery time is less than or equal to the order interval T.
- The delivery time is larger than the order interval T.
1. How many orders should be considered?
2. How do you calculate the difference in time between the orders, that is, the order interval T?
3. How do you calculate the reorder point?
Let’s start with the first case. Since the existing stock on the date the order is received is equal to zero, the balance at T– should equal the total consumption during the time interval. Then the reorder point can be calculated by multiplying the average daily consumption of an article with the delivery time in days, then adding the safety stock.
In general, a higher safety stock is required, which allows for more fluctuation in demand and delivery processing time.
OK, maths class is over. Let’s look at the benefits of managing reordering smarter.
Benefits of automating inventory purchasing
One of the most effective ways to improve inventory purchasing accuracy and efficiency is to use an automated reorder system. However, whilst many businesses have an enterprise resource planning (ERP) system, often they still lack the functionality to optimise purchasing and so make the calculations in Excel.
But, with a large number of different products to manage, and sometimes multiple locations and different buyers, the margin for error becomes massive. Manual handling of all these variables is both very time consuming and labour intensive, which has a negative effect on the business’ profitability.
Inventory optimisation systems (such as EazyStock) connect to ERP systems to create a smarter replenishing resource for buyers and planners. There are 3 ways optimisation software helps businesses:
1. Lower carrying costs and operating costs
2. Reduce inventory levels and improve inventory turnover
3. Deliver higher service levels and customer satisfaction
An automated replenishment system continuously monitors inventory levels, sales forecasts and consumption while eliminating human errors created in Excel based calculations.
The first step towards better inventory purchasing is knowing the correct way to calculate your optimal reorder points. Most businesses manage these calculations in Excel or in accounting solutions, but ideally this should be done through your ERP system. However, most ERP systems do not use advanced replenishment calculations and automation unfortunately. Luckily for planners, cloud based inventory planning software like EazyStock can easily integrate with any ERP for enhanced management capabilities.
When choosing an inventory management and replenishment system:
1. The system should be tailored to the specific needs of your business
2. It should be easy to use
3. Implementation should be quick and deliver results fast
A replenishment system also has certain essential functions:
- The system should calculate demand forecasting for each individual item carried in inventory and seasonal variations and trends should update automatically.
- The system must be able to calculate efficient safety stock levels for each item, taking into account demand predictability, delivery processing times, and delivery accuracy.
- Quantities of products and lead times for individual suppliers can be optimised with consideration to cost.
- By combining automatic routine orders with order proposals for certain major products and automatic exception management, product replenishment should be more efficient and less difficult to manage.
The result is optimised inventory purchasing. To find out more about EazyStock or request a demo, please get in touch.