November 7, 2006
Volume 2 Issue 86

Reordering on a Food Oriented Software Program…Part 2

   In the past 5 issues we have showed 2 different ways to calculate your safety stock and amount to reorder. We started out very simple in Issue 82 but warned that although the method works there are some times where you will have way too much stock or not enough stock to supply demand. The Major Reason For Calculating Safety Stock Is To Raise Customer Satisfaction. Then in Issue 83 we described a method we called the Historical Value Approach that took the simple formula used in Issue 82 but was directly related to Historical sales, past lead times, and customer service levels. After comparing the two methods in Issue 84, we took the best of both words and showed how a Food Oriented Software Program is both accurate and uncomplicated to use. In this issue we are going to explain, using a business example, how the computer software calculates  how much to reorder. As always we need to give the software some basic information about the product. The more advanced system you invest in the less tracking you have to manually do. For our example we will be using cases of sausages as our product:

  Along with your basic information about the sausage you will also need some historical sales numbers to help us find the Weighted Daily Average Sales. What happens is that each week of sales is weighted differently making your most recent sales mean more than sales that happened in the past. The amount of time you wish to go back and find sales numbers is completely up to you. In our example we will use 6 weeks of sales.

 You can see that the sales data from 1 week ago is weighted the most with a 6 and 6 weeks ago is weighted the least with a 1. You want your most recent data weighted the most because it is the closest data you have to what the current market is doing. You multiply the weight of the week by the amount sold in the week to get your weighted sales for the week. These weighted sales numbers are then added up to give you your Total Weighted Sales. This number is then divided by your sum of weighted weeks and number of selling days in a week:

4925(Total Weighted Sales) ÷ 21 Days (Sum of Weighted Weeks) ÷ 7 days in Week =

34 Weighted Daily Average Sales

   After the software calculates those numbers it can find out what your critical quantity on hand is. Your critical quantity on hand is a very important number in figuring out your suggested reorder amount. The critical quantity on hand is just what we have been calling the Adjusted Reorder Point. The way you calculate your critical quantity on hand amount is take your Weighted Daily Average Sales and multiply it by your complete order cycle (complete order cycle is a phase I created, it means Frequency of reorder + Lead Time) and Reorder Adjustment.  Your reorder adjustment is the number of extra days of stock you want to keep on hand as your safety stock. We have our Reorder Adjustment set to 1.5 day which means we want and extra 50% stock on hand as a safety stock.

34 Weighted Daily Avg. Sales x 10(complete order cycle) x 1.5(Reorder Adjustment) =

510 Cases Held as Critical Quantity On Hand

   Now that the software has calculated the Critical Quantity On Hand (or Adjusted Reorder Point) it can now begin to calculate your Suggested Reorder Amount. This calculation is a simple subtraction of the Critical Quantity On Hand minus the amount available on hand minus the amount that is on order to sell in expected days. The amount on order to sell in expected days is calculated by multiplying your complete order cycle by your reorder adjustment.

10(complete order cycle) x 1.5(Reorder Adjustment) = 15

   Lets say that it is the first of the month. We have 10 cases on order and 8 are on the 15^th while the remaining 2 are due after the 15^th. The software would use 8 as the “amount that is on order to sell in expected days.”  

510 Cases Held as Critical Quantity On Hand – 20 Cases on Hand – 8 on order =

482 Cases should be reordered

   So as you can see according to software you should reorder 482 cases of sausage in order to not be out of stock. You must remember we are explaining what the computer system is doing in the background, all you, as the user, have to do is make sure you are doing the proper procedures to correctly track inventory using the software. As we said back in Issue 19, “This isn’t about technology this is about your business…” Using a Food Oriented Software Program to help calculate how much you should reorder will give your more time to run and grow your business and less time calculating numbers.

USING FOOD SOFTWARE TO GET REORDER AMOUNTS WILL GIVE YOU MORE TIME TO GROW YOUR BUSINESS

To Unsubscribe to this newsletter please respond to email with "UNSUBSCRIBE" in the subject line.

Thank you.