Reorder Points, Minimum Order Quantities, and Toilet Paper?
One of the challenges in supply chain is often-times we use the same terms to describe different things. “Safety Stock” to one person or company might be a “Reorder Point” to another. Other people might describe a “Minimum Quantity” when what they are really describing is a “Safety Stock”. That is why it’s critically important at Right Sized Inventory (RSI), when we first meet with clients, to clearly define terms and vocabulary.
The following excerpt is from an email where I was attempting to explain the concept of a Reorder Point (ROP) buy using a simple example and common English. By taking this approach, we not only manage to explain the concept of ROP, but also delve a bit into the parameters that feed our patented RSI simulations to determine the right ROP (or Safety Stock, or Min-Max, etc.) for each inventory item in each location.
In this particular example, the client questioned why RSI’s recommended Reorder Point was so low when the items demand was fairly steady. It’s important to note that a particular and often overlooked aspect for this inventory item (SKU - Stock Keeping Unit) in this location was it had a high Minimum Order Quantity (MOQ).
We thought this example might be a benefit to others as well! So here is the explanation:
Let’s try explaining this another way. You decide you want to buy toilet paper (TP) from Amazon and they are having a mega sale on 500 rolls of TP for an unreal price. That’s a LOT of TP all at once, but you buy it because the deal is too good to pass up. However, you must buy 500 rolls at one time to get the amazing deal on each roll of TP.
So you go to place your order with Amazon, and your current TP on hand at your house is about 10 rolls, which seems about the right time to get TP and not run out. Maybe your family REALLY likes TP like mine does, and you consume 1 roll per day (true story). Amazon is quoting you 3 days for your 500 rolls to arrive.
Regarding the TP usage, you remember that unfortunate incident with Aunt Peggy’s potato salad sitting out too long, causing lots of GI issues most likely due to salmonella, resulting in your family’s daily TP usage to spike to 5 rolls in one day! Or the other time when (pre-covid) you had a houseful of guests unexpectedly and the TP usage spiked for a few days. In any case, when you’re down to 10 rolls you believe you absolutely need to reorder because you know how much you use in general and you don’t want to get suprised by demand spikes that have been known to happen causing you to run out.
Now fast forward 3 days after your bulk order…the lead time it takes you to get your Amazon order of 500 rolls of TP is 3 days…so now you have 7 rolls of TP at your house when the Amazon truck rolls up and unloads the 500 you purchased! Because remember…the only way you get your awesome deal is by ordering 500 rolls minimum. Now you have 507 rolls of TP at your house as the Amazon truck is driving away.
Tomorrow you will have 506 rolls, the next day 505, until you go about 500 days and realize “oh, I only have 10 rolls of TP left. I need to reorder more!”
If you would have taken the expected average inventory for the previous 500 days, you would learn that you had about 255 rolls of toilet paper in your house throughout that time. That is the expected quantity on hand over the last year. So in this example, 10 is the ROP, 500 is the Minimum Order Quantity, the Lead Time is 3 days…and that’s how an ROP of 10 can yield an expected quantity on hand of 255.
At RSI, we don’t just have an incredible tool that takes all supply chain factors needed to accurately simulate each item’s supply chain to determine the optimal inventory level of every item in every location needed to support a service level…we also take a lot of pride in being able to explain every single answer we give. What we do makes so much sense, but it is very different then the ways we were all taught (and that is a good thing).
Where we separate ourselves is the ability to respond to any question from our clients relative to the answer we are giving, because it is very likley it will be different than what they are used to. Being able to explain the exact reasons for the results of a software’s output should be a standard operating procedure in the industry, but often this simple act is lacking.
After all, an answer is only a “good answer” if it can be trusted.