Four SKUs, Four Reorder Points and a Jam Discount
At a neighbourhood store, the owner tracks four SKUs. Average daily sales, current stock, supplier lead time and shelf life are:
- Milk 500 ml: 80 units/day, 240 units in stock, 2-day lead time, 3-day shelf life.
- Atta 10 kg: 12 bags/day, 90 bags, 5-day lead time, 60-day shelf life.
- Imported jam: 2 jars/day, 160 jars, 15-day lead time, 75-day best-before, cost ₹260 a jar.
- Local biscuits: 50 packs/day, 100 packs, 1-day lead time, 90-day shelf life. The owner keeps safety stock of one day's sales for milk and biscuits, two days for atta and five days for jam. A bank loan finances stock at 12% a year, and shelf space is tight. The jam supplier offers 10% off on orders of 100 jars or more, and the owner has been buying 100 jars at a time to save money.
1. Calculate the reorder point for each SKU and compare it with current stock. Which items need action today?
Read the worked answer
Reorder point = average daily sales × lead time + safety stock.
- Milk: 80 × 2 + 80 = 240 units. Current stock is 240, so it is exactly at ROP; order today, but in a quantity that sells within shelf life. A 3-day shelf life means do not order more than about 160-240 units, and check cold-chain temperature.
- Atta: 12 × 5 + 24 = 84 bags. Current 90 is 6 bags above ROP, so no urgent order; review tomorrow and place a small order if sales run above 12 a day.
- Jam: 2 × 15 + 10 = 40 jars. Current 160 is 120 jars above ROP, equal to 60 days of extra stock. Stop ordering and clear stock.
- Biscuits: 50 × 1 + 50 = 100 packs. Current 100 is at ROP; order today. Action today: milk and biscuits need an order; jam needs a freeze and a markdown plan; atta is the only comfortable one.
2. Is the 100-jar jam order financially sound? Calculate the discount, holding cost and expiry risk, and recommend what to do with the 160 jars already in stock.
Read the worked answer
Annual jam sales = 2 × 365 = 730 jars. A 100-jar order lasts 50 days. The 10% discount is ₹26 a jar, or ₹2,600 per order; if all 730 jars are bought at that rate, the saving is about ₹18,980 a year. The extra holding cost is on the cycle stock above a 40-jar order: average stock rises from about 30 jars to 60, an extra 30 jars. At 12% and ₹260 a jar, that is 30 × 260 × 0.12 = ₹936 a year. So the discount is financially sound if sales are steady and there is no waste. The problem is the existing 160 jars: at 2 a day they last 80 days, but the best-before is 75 days, so about 10 jars (₹2,600) will pass their date. Recommendation: pause the next order, bundle 2 jars for ₹450 or move stock to a nearby store, and resume 100-jar orders only when stock falls to 40. The discount is not the error; ordering 100 while holding 160 is.
3. Recommend a counting and ordering policy for these four SKUs using ABC/FSN logic.
Read the worked answer
Value and perishability point in different directions. Atta has the highest annual value (12 × 365 × ₹380 = ₹16,64,400), so it is A-class and should be counted weekly with a purchase order based on the 84-bag ROP. Milk is lower annual value but fast-moving and perishable, so count it daily and use a fixed daily order; do not let an ABC label hide its criticality. Jam is C-class by value but slow-moving and capital-heavy at current stock; count it monthly and put a freeze on bulk buying until stock is below 40. Biscuits are C-class and fast-moving; use a simple bin card or POS reorder alert at 100 packs. The policy should specify who counts, when, and what triggers an order, otherwise the ROP calculation is only a number on paper.