Step by Step Guide to Optimising Inventory Purchasing

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Tags: Blog, Inventory management, Purchasing & replenishment, Tips & Tricks

Daniel Fritsch   16 June 2016


Inventory Purchasing Optimizing Guide

Index

  1. Optimising inventory purchasing
  2. Calculation of optimal re-order points
  3. Benefits of automating inventory purchasing
  4. Next steps

“This product’s sold out” is a phrase 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 and 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 re-order management. In a perfect world, all re-order quantities are directly tied to real-time customer demand. Demand needs to be strategically analysed to ensure optimisation. There are 3 traditional ways to organise product replenishment, depending on the need and product type. They are the:

  1. Order pattern method – making consistent purchases of a fixed amount
  2. Re-order point process method – re-ordering stock when it falls below a certain level
  3. Control rhythm method – checking inventory at fixed intervals and adjusting re-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 re-ordering. To fix this lets take a look at a few specific examples of how to calculate the optimal replenishment point, based on existing datasets.


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Calculation of optimal re-order points

Let’s get back to the basics. Sales rate and delivery time are necessities for calculating the optimal re-order 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 re-order 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?

Equation, No. of Orders

2. How do you calculate the difference in time between the orders, that is, the order interval T?

Equation, Time

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 re-order point can be calculated by multiplying the average daily consumption of an article with the delivery time in days, then adding the safety stock.

Equation, Ordering Point

In general, a higher safety stock is required, which allows for more fluctuation in demand and delivery processing time. OK, math class is over. Let’s look at the benefits of managing re-ordering smarter.


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Benefits of automating inventory purchasing

For companies with large inventories across many different locations, one of the most effective ways to make the supply more accurate and efficient is the use of an automated re-order system. Contrary to popular belief, this process is often not managed in your ERP system. Yes, orders are submitted to the ERP, but usually hese calculations live? Yep, you guessed it…EXCEL.

truck on road - optimizing inventory purchasing

With a large number of different products to manage, multiple locations, different warehouse managers, 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 (i.e. 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. Create smaller inventories and higher inventory turnover

3. Deliver higher service levels and customer satisfaction

An automatic replenishment system continuously monitors inventory levels, sales forecasts and consumption while eliminating human errors created in Excel based calculations.

Next steps

The first step is knowing the correct way to calculate the optimal re-order points, which is an essential indicator in replenishment planning. Most businesses manage these calculations in Excel or in accounting solutions like QuickBooks, but the best way to calculate reorder points is actually through your ERP System. ERP Systems do not come standard with these types of calculations and automation unfortunately. Luckily for planners, cloud based inventory optimisation software like EazyStock can easily connect to the ERP for enhanced management capabilities.

Every business is different regarding supply chains, cost structures, products, etc. However, inventory management and replenishment remains the same operation with the industry or size being the only differences. For optimizing inventory purchasing, some important factors must be considered 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 and onboard

3. Implementation should be quick and deliver results fast

 


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A replenishment system also has certain essential functions:

  • The system should automatically provide forecasting for each individual item carried in inventory and seasonal variations and trends in demand should change automatically.
  • The system must be able to calculate efficient safety stocks for each item, taking into account demand predictability, delivery processing times, and delivery accuracy.
  • Quantities of products and distances for individual suppliers can be optimized 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.

The result is optimising inventory purchasing. To learn more about what is to consider in replenishment planning and restocking and what current models exist to rebuild stocks, contact EazyStock.