Exam-season stockout: setting a reorder point against a discount slab
At a school-supplies shop in Hisar, the exam season begins in 18 days. The Ludhiana supplier's lead time is 6 days and has never varied by more than one day. Last year the shop ran out of A4 ruled registers in the peak week. For one fast SKU - a 300-page ruled register - the expected peak daily sales are 40 units, and the owner's standing policy is safety stock equal to 2 days of peak sales. Current stock is 210 units, and each register costs ₹48. The godown can hold only 400 more units of this SKU. Meanwhile 900 units of a 'fancy' register, selling 3 a day, occupy the rack where the fast SKU would go. The supplier offers 12% off orders of 500 or more. The owner has ₹60,000 of free cash.
1. Calculate the reorder point for the fast register. Should the shop order now, and how much should it order? Show the arithmetic and the trade-off.
Read the worked answer
Reorder point (ROP) = (lead time + safety days) × daily sales = (6 + 2) × 40 = 320 units.
Order now? Stock is 210, which is 110 below the ROP. At 40 a day, 210 units last 210 ÷ 40 = 5.25 days, and replenishment takes 6 days - so the shop runs dry before the delivery arrives even before peak fully starts. Yes, order immediately.
How much - the trade-off.
- 500 units hits the discount: 500 × ₹48 = ₹24,000, less 12% = ₹21,120, saving ₹2,880. Cash is available.
- But the godown takes only 400 more, so 100 units would be left in the aisle or back office - blocking movement, risking damage, and creating a fire-loading problem in a small shop. That is a real cost against ₹2,880.
- Buying 400 at full price costs ₹19,200 and fits - but forgoes the discount.
Best answer: ask the supplier for the 500-unit price with delivery in two lots - say 250 now and 250 in five days. At 40 units a day, 250 units are consumed in about six days, so the space frees itself before the second lot arrives. If the supplier refuses, order 400 now and top up after the peak week begins rather than store stock in an aisle.
2. What should the shop do about the 900 fancy registers? Justify your answer with a space-and-cash argument.
Read the worked answer
The numbers first. 900 units at 3 a day is 300 days of stock - about ten months occupying rack space that a fast mover needs. The fast register turns 40 a day; at ₹48 that is roughly ₹1,920 of sales per day from a similar piece of shelf, against about ₹180–200 from the fancy register. Even allowing for a higher margin percentage on the fancy item, the space earns a fraction of what it could.
Second, the cash. Nine hundred units at cost is cash sitting still for most of a year. That is money not available for the exam-season buy, where the same rupee comes back in days.
Actions, in order:
- Stop reordering the fancy register completely.
- Move it off the prime rack to a lower or back shelf, keeping perhaps 100 units for walk-in demand.
- Clear the balance through bulk offers to coaching centres and schools at a 20–25% markdown, or bundle it free with a large notebook order. A markdown taken now is cheaper than storage, damage and the peak sales the fast SKU loses.
- Set a clearance date. After it, whatever remains gets a heavier markdown or is returned to the supplier if returns are allowed.
Judgement to state: the point of shelf space is sales per square foot per day, not how many units the shop owns.
3. What record should the shop keep so that the reorder point is not wrong again next season, and what is the flaw in treating 320 as a fixed number?
Read the worked answer
Keep a bin card (stock card) for each fast SKU showing date, receipts, issues, balance, and a running note of the daily sales rate, with the ROP and order quantity written on the card. Update the sales rate weekly during the season, and record the actual delivery dates so the real lead time is known rather than assumed.
Why 320 is not a fixed number: it was calculated from 40 units a day, which is the peak-season rate. Off season the same register may sell 8 a day, and the ROP would then be (6 + 2) × 8 = 64 units. If the shop keeps ordering to 320 in a slow month, it sits on five weeks of stock and ties up cash - the same mistake as the 900 fancy registers, just with a different item.
Other assumptions that can break:
- Lead time was 6 days with variation of at most one day. If the supplier slips to 10 days, safety stock of 2 days is not enough.
- Safety stock is a decision, not a law: a 2-day buffer protects against normal variation, not against a supplier failure in peak week.
- Daily sales of 40 is an average; the peak week may sell 70 on the busiest day, so the buffer should be judged on the maximum plausible day, not the mean.
Rule to state: recalculate the ROP whenever the sales rate or the lead time changes, and review it at the start of every season.