Final answer:
Inventory management involves overseeing the supply, storage, and accessibility of items to ensure adequate supply without excessive surplus. The reorder point is a critical aspect, which is calculated based on average daily sales, lead time, and safety stock to determine when new inventory should be ordered.
Step-by-step explanation:
Inventory management is a systematic approach to sourcing, storing, and selling inventory—both raw materials (components) and finished goods (products). In business, inventory management is crucial for staying profitable. It ensures that there's enough stock on hand to meet customer demand without excess which can lead to losses.
Now, let's talk about the reorder point. This is calculated to determine when it's time to order more inventory before running out. You don't want to have too much because it ties up capital and may go to waste, but you don't want to have too little and miss out on sales.
Here's an example: Suppose your store sells specialty coffee beans, and you sell an average of 10 bags per day. It takes 7 days for a new shipment to arrive after you order. You should always have at least a safety stock to cover unexpected spikes in demand, say 20 bags. So, your reorder point would be the daily sales multiplied by the lead time plus the safety stock. That's (10 bags/day * 7 days) + 20 bags = 90 bags. When your inventory falls to 90 bags, it's time to reorder.
So, effective inventory management involves knowing your reorder point to ensure seamless operation and customer satisfaction.