Inventory management is an important aspect of retail strat- egy. For example, it is important to know when it is time to reorder and how much to order at a time, a metric called re- order point. As consumers buy a product day after day, the inven- tory level declines. The question for retailers is how low they should allow the inventory level to dedine before they place an order; that is, when is the optimal time to reorder? If you order too late, you take a chance of losing sales because you are out of stock. If you order too soon, consumer tastes may change, and you will be stuck with excess and unsellable mer- chandise. And generally, retailers do not want more inventory on hand than is necessary to avoid stock-outs because inven- tory ties up cash. Hence, the decision of when to order and how much to order is critical to a retailer's bottom line. The simplest formula to determine the reorder point is the following: Reorder point x Usage rate + Lead time Usage rate is basically how quickly the inventory sells, and lead time is the length of time from reorder to delivery. Retailers tend to keep a little extra stock on hand-"safety stock"-just in case their historical data on usage rate and lead time might vary from any one particular reorder ex- perience. Adding in safety stock, the formula becomes the following: Reorder point x (Usage rate x Lead time) + Safety stock Sam's 24-Hour Gas 'n' Sip sells 97 large sodas a day. It takes five days to place an order and receive a new shipment of large cups. But to be prepared for the possibility of extra sales or a late shipment, they need to have a safety stock equal to three days of sales. 12-33. What is the reorder point for large cups for Sam's gas station?
Inventory management is an important aspect of retail strat- egy. For example, it is important to know when it is time to reorder and how much to order at a time, a metric called re- order point. As consumers buy a product day after day, the inven- tory level declines. The question for retailers is how low they should allow the inventory level to dedine before they place an order; that is, when is the optimal time to reorder? If you order too late, you take a chance of losing sales because you are out of stock. If you order too soon, consumer tastes may change, and you will be stuck with excess and unsellable mer- chandise. And generally, retailers do not want more inventory on hand than is necessary to avoid stock-outs because inven- tory ties up cash. Hence, the decision of when to order and how much to order is critical to a retailer's bottom line. The simplest formula to determine the reorder point is the following: Reorder point x Usage rate + Lead time Usage rate is basically how quickly the inventory sells, and lead time is the length of time from reorder to delivery. Retailers tend to keep a little extra stock on hand-"safety stock"-just in case their historical data on usage rate and lead time might vary from any one particular reorder ex- perience. Adding in safety stock, the formula becomes the following: Reorder point x (Usage rate x Lead time) + Safety stock Sam's 24-Hour Gas 'n' Sip sells 97 large sodas a day. It takes five days to place an order and receive a new shipment of large cups. But to be prepared for the possibility of extra sales or a late shipment, they need to have a safety stock equal to three days of sales. 12-33. What is the reorder point for large cups for Sam's gas station?
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:Inventory management is an important aspect of retail strat-
egy. For example, it is important to know when it is time to
reorder and how much to order at a time, a metric called re-
order point.
As consumers buy a product day after day, the inven-
tory level declines. The question for retailers is how low they
should allow the inventory level to dedine before they place
an order; that is, when is the optimal time to reorder? If you
order too late, you take a chance of losing sales because you
are out of stock. If you order too soon, consumer tastes may
change, and you will be stuck with excess and unsellable mer-
chandise. And generally, retailers do not want more inventory
on hand than is necessary to avoid stock-outs because inven-
tory ties up cash.
Hence, the decision of when to order and how much to
order is critical to a retailer's bottom line. The simplest formula
to determine the reorder point is the following:
Reorder point x Usage rate + Lead time
Usage rate is basically how quickly the inventory sells,
and lead time is the length of time from reorder to delivery.
Retailers tend to keep a little extra stock on hand-"safety
stock"-just in case their historical data on usage rate and
lead time might vary from any one particular reorder ex-
perience. Adding in safety stock, the formula becomes the
following:
Reorder point x (Usage rate x Lead time) + Safety stock
Sam's 24-Hour Gas 'n' Sip sells 97 large sodas a day. It
takes five days to place an order and receive a new shipment
of large cups. But to be prepared for the possibility of extra
sales or a late shipment, they need to have a safety stock
equal to three days of sales.
12-33. What is the reorder point for large cups for Sam's gas
station?
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