Reorder Point (ROP) system is a process where the inventory is restored as soon as the existing stock hits a specific bottom. This will help in ensuring that there is no interruption in the production and also saves on extra costs.
Given the fact that every item has its own importance and a usage rate in the production process, the reorder point differs for every item. It also is dependent on several other factors such as discounts, the delivery time of the item and so on.
With the evolution of ERPs, this process is automated and hence very simple to perform. All the crucial is tracked in the system and is taken care of. Early ordering also helps in cutting down high costs put forth by vendors and administers good negotiation.
Below is the formula for finding reorder point,
Reorder Point = (Lead Time + Safety Stock + Basic Stock) * Unit Sales Per Day
Lead time is the time difference between a purchase order issued and product delivery.
Safety stock is the number of days’ worth of products to be stocked in case of unexpected emergencies.
Basic stock is the number of days’ worth of stock which is generally maintained.
- One of the key benefits of this system is that it allows a smooth inventory flow with no halts in between. This further builds on the inventory discipline of your business.
- Makes space to identify procurement issues and helps in resolving the same leading to a smoother process.
- Makes sure that the stock is available at all times and thus avoids any production glitches.
- Unnecessary expenditure in stocking and maintaining the inventory is reduced.
- Helps the business to make appropriate decisions by helping to track the entire procurement procedure.
Get more definitions about reorder point (ROP) system and other ERP related terms here.