Basic Order Point is the stocking level at which, if we place the order the day we reach OP, we should expect to get the inventory before we start using our safety stock. Logically, Order Point is based on the amount we expect to sell during the lead time.
Order Point = Safety Stock + (Lead Time * ADU)
As soon as any item from a vendor hits order point, it’s time to cut a PO to that vendor, or we risk running out. Order Point is why it’s important to have accurate lead times.
There are several ways we may adjust order point to achieve better results, but we will cover those later.
The order point helps you determine when is the right time to buy. A reliable order point is critical; however, it’s calculated based on average product usage. As most distributors know, averages don’t always represent customers’ buying habits. The goal of the order point adjusters is to provide a tool for calculating accurate order quantities for those products that experience demand that is infrequent or where order quantities vary considerably from one order to another. This tool will help improve customer service by preventing stockout situations for products that experience unusual usage patterns.