Reorder Point Under Festival Demand
At a neighbourhood grocery in Tezpur, the 200 g pack of roasted chana is a fast mover. Normal demand is 40 packs a day, but in the 10 days before Bihu it rises to about 70. The distributor's usual lead time is 6 days; during the festival it stretches to 10. The store keeps safety stock equal to 3 days of demand. This morning the shelf has 520 packs and an open order of 200 packs is due in 4 days. The batch on the shelf is 60 days old against a 90-day shelf life, so the owner does not want to over-order. The pack sells for ₹50 and earns a contribution of ₹6. Air-freighting a supplementary order would cost ₹2,500 and arrive in 3 days. The owner asks the shop assistant to decide whether to order now, how much, and whether air freight is worth it.
1. Calculate the festival reorder point and the store's inventory position. Should the assistant place a supplementary order today? Show the arithmetic and state any assumption about the open order.
Read the worked answer
Reorder point (ROP) = demand during lead time + safety stock
= (70 × 10) + (70 × 3)
= 700 + 210 = 910 packs
Inventory position = stock on hand + open order
= 520 + 200 = 720 packs
Because 720 is below 910, the store is already inside its reorder trigger by 190 packs. The position will get worse: the open order arrives on day 4, when stock would be 520 − (4 × 70) + 200 = 440 packs. From day 4 to day 10, demand is 6 × 70 = 420 packs, leaving only 20 packs on day 10. Safety stock of 210 packs is breached around day 7. A normal order placed today would also arrive on day 10, so any slippage means a stock-out.
Decision: place a supplementary order today. At minimum, order enough to restore the position to ROP (190 packs). Because ROP is only a trigger, the order quantity must also cover the review period. If the owner reviews weekly, add 7 × 70 = 490 packs, giving about 680 packs; round to a full case size. Assumption: the 200-pack open order is firm and will arrive on day 4; if it is at risk, the order must be larger.
2. Air freight costs ₹2,500 and each pack earns ₹6 contribution. Is air freight financially justified? What non-financial factors could change the decision?
Read the worked answer
The direct contribution at risk is the stock that would otherwise be lost before the normal order arrives. Using the 190-pack shortfall against ROP: 190 × ₹6 = ₹1,140. Air freight at ₹2,500 therefore costs more than the direct margin it protects.
The break-even quantity is ₹2,500 ÷ ₹6 = about 417 packs that would not otherwise be sold. That is far more than the 190-pack shortfall, so on direct margin alone air freight is not justified.
The decision could change if:
- the store expects to lose regular customers who buy other high-margin items in the same basket;
- the distributor's normal delivery is unreliable and a stock-out would last several days;
- a festival promotion or a large institutional order would sell the extra quantity;
- the 60-day-old stock creates a shelf-life risk if too much is held, which argues against a large air shipment.
A better judgement is to negotiate a part-load from the distributor, borrow stock from a nearby store, or accept a short period of reduced shelf display rather than pay ₹2,500. Air freight is only worth it if the basket margin or reputational cost is clearly above ₹1,140.