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Beginning
Thank you for the opportunity so we benefit from each other in the field of inventory control
Before answering the above question must be indivisible question.
First-
What is a reorder point?
A reorder point is the inventory unit quantity on hand that triggers the purchase of a predetermined amount of replenishment inventory. If the purchasing process and supplier fulfillment work as planned, the reorder point should result in the replenishment inventory arriving just as the last of the on-hand inventory is used up. The result is no interruption in production and fulfillment activities, while minimizing the total amount of inventory on hand.
Second-
what are the safety stock levels
Safety stock is the stock held by a company in excess of its requirement for the lead time. Companies hold safety stock to guard against stock-out.
The difference is clear between them
Safety Stock = (Maximum Daily Usage - Average Daily Usage) × Lead Time
Lead time is the time which supplier takes in ordering the items
Example
ABC Ltd. is engaged in production of tires. Purchases rims from DEL Ltd. an external supplier. DEL Ltd. takes 10 days in manufacturing and delivering an order. ABC's requires 10,000 units of rims. Its ordering cost is $ 1,000 per order and its carrying costs are $ 3 per unit per year. The maximum usage per day could be 50 per day. Calculate economic order quantity, reorder level and safety stock.
Solution
EOQ = SQRT (2 × Annual Demand × Ordering Cost Per Unit / Carrying Cost Per Unit)
Maximum daily usage is 50 units and average daily usage is 27.4 (10,000 annual demand ÷ 365 days).
Safety Stock = (50-27.4) × 10 = 226 units.
Reorder Level = Safety Stock + Average Daily Usage × Lead Time
Reorder Level = 226 units + 27.4 units × 10 = 500 units.
Safety stock describes a level of extra stock that is maintained to mitigate risk of stockouts.
The reorder point is the level of inventory which triggers action to replenish inventory stock. ... It is normally calculated as the forecast usage during the replenishment lead time plus safety stock.
determine the consumption for the last 12 period
determine the STD for the last 12 period
determine the average daily consumption
determine the SS equal STD for the last 12 period
determine the lead time for every material
determine the DDLT demand during lead time
DDLT= AVERGAE DAILY CONS.*LEAD TIME
R.O.P.= DDLT+SS
If your finished goods or raw materials takes the time to deliver from on destination to another destination so to avoid any loss while producing that product or selling that product professional use the reorder point to fix specific point through which they will reorder the specific qty's again to avoid any loss.
Safety stock terminology mostly used to manage the demand against uncertain conditions i.e. flood, war, strikes etc because if you set the reorder level then in such conditions you can't get the stock so industries bear the safety stock carrying cost for such conditions.
Reorder point is the level of stock that acts as alarm clock to place next order.The next order is placed when the stock level is at some pre estimated point.
Safety stock is the amount of stock that is kept for shortage of regular stock.
We can have an example of a bike fuel cunsumption. When the fuel comes down to reserve level we need to refill our tank that is reorder point and the amount of fuel kept reserved is the safety stock.
Formula
Reorder point=average daily consumption X delivery lead time + safety stock
Safety Stock is calculated by considering various factors Like delivery lead time variences.
Stock reorder point is the the stock level at which an order is placed as the inventory is at the minimum required level. safety stock is a generic term used for buffer stock that you may need to avoid stockouts.
Stock reorder point can set through the system by putting alert/warning in stock level, doing this while stock are getting low, system will automatically give the warning/information for those stock which need to be reorder. Safety stock levels also can set as like as reorder point. We can set maximum stock number and minimum stock number.The reorder point (ROP) is the level of inventory which triggers an action to replenish that particular inventory stock. It is a minimum amount of an item which a firm holds in stock, such that, when stock falls to this amount, the item must be reorderedSafety stock Point (SSP) is an additional quantity of an item held in the inventory in order to reduce the risk that the item will be out of stock, safety stock act as a buffer stock in case the sales are greater than planned and or the supplier is unable to deliver the additional units at the expected time.
While setting Stock reorder point ,we must consider certain parameters which are consumption of the product, current ctock, future orders if any, Lead time for the product to reach factory and buffer stock. And finally the safety stock level is nothing but the bufferstock whichmust be atleast for the period of the leadtime.
My other friends have explained well about terminology difference, I will just add my comments on controls. Stock recorder or safety stocks levels depending upon your market conditions and demand forecast, It could be determines through the consultation with sales team, previous sales history and current market condition, furthermore you can also add supply base strength as well.
Re-order Point :
Stock re-order point and safety stock are very vital concepts to avoid stock- outs. Re-order points tell you when you want place replenishment order. In a simple example, a tea shop owner knows his sugar stock is enough till tomorrow morning according to his daily consumption assumption. He need new bag of sugar for tomorrow. If he calls the supplier today before2: PM, he will supply one bag of sugar tomorrow morning8: AM. The re-order point is today2: PM for the shop owner. Before calculating re-order point, you should understand following things:
a) Your daily / weekly / monthly consumption or usage
b) Lead time (the time required by the supplier to deliver the shipment at your premise. Lead time will be varied according to your delivery terms, mode of transport and incoterms are used in the contract. If it is based on Ex-works, please add transportation, clearance etc.. from the order acknowledgement date till the shipment receipt date at your premise.)
c) Any anticipated special orders : You may expect special orders with special quantities in specific frequencies.
Above information will help you to find out your re-order point. The basic understanding is ‘how much quantity you need to meet your demand until you get your next replenishment order, that is called re-order point’.
Re-order point calculation :
a) Lead time (LT)
b) Average daily consumption(ADC)
c) Safety Stock (ST)
Re-order point = (LT x ADC) + ST
Safety Stock :
Safety stock is excessive stock to prevent stock-outs. Forecast errors, fluctuations in lead-time, variability in customer demand or production are some of the factors create stock outs scenarios. Safety stock determination is not intended to protect from stock outs, but it will help to eliminate majority of stock outs.
The different elements effects the safety stock calculations are widely:
a) Variability in lead-time
b) Variability in demand
c) Frequency of exceptional orders
Safety tock can be and effective way to mitigate demand uncertainty, lead time vulnerability while providing high service level to customers. When determining a plan for what level customer service to be provided, then determine what level of safety stock and what degree of stock out protection required to meet the determined service level.
In the above example at beginning, safety tock is the quantity required by the tea shop owner to meet his customer demand from today2: PM till tomorrow8: AM for special unexpected demand from customerstoday or and hour delay in sugar delivery tomorrow.
There is alternative method to mitigate variability other than safety stocks. One of them is implementing order-expediting process. This practice is especially reliable for high cost products. As an example, consider an expensive but relatively lightweight product. Holding cost for the product will be high but an air transport of the material to expedite delivery rather than sea freight will be more economic while comparing with the holding cost.
Another option to avoid safety stock is MTO (make-to-order) or FTO (finished-to-order) production environment.
Safety stock calculation:
d) Maximum Daily consumption (MDC)
e) Maximum Lead time (MLT)
f) Average daily consumption(ADC)
g) Average lead time (ALT)
Safety stock = (MDC x MLT) – (ADC x ALT)
Difference between re-order point and safety stock :
- Re-order point tell you when you want to book your next replenishment order
- Re-order point tell you the quantity required to meet customer demand until placing next order
- Safety stocks tells you how vulnerable is your forecast
- The quantity required to meet customer demand without stock-outs
- Face unexpected demand or short supply for a short period
Re-order point envisages when you want to place replenishment to meet certain customer demands and safety stock level tells what extend you can meet uncertain customer demands.
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