How Much of a New Product Do You Buy?
By Jon and Matt Schreibfeder
Last month we introduced a new product questionnaire to help you effectively control the process of
adding items to your stock list. This month we will explain how to effectively decide the actual quantity
to buy of each of these new items. This decision should be based on four factors:
1) Anticipated Demand for the Item. Products can be divided into two categories: Those with
anticipated recurring usage and those with sporadic demand.
a) Recurring items will be sold or used at least once a month. Ask the person requesting a new item
be stocked for a demand forecast for the product for each of the first six months after
introduction. To ensure that these predictions are not overly optimistic, set up a review session at
the end of each of these months. If actual usage is less than 75%, or more than 125% of the
forecasted quantity, the person requesting the product should, if necessary, revise the forecasts for
subsequent months.
b) Items with sporadic demand are not expected to be sold at least once a month. Many repair parts
fall into this category. The person requesting the item be brought into stock must specify the
quantity of the product that will normally be sold or used in one transaction.
2) The Anticipated Lead Time for the Item. Once placed on a replenishment order, how long does it
take to receive a replenishment shipment from the normal source of supply?
3) The Order/Review Cycle. The order or review cycle is the frequency you place replenishment
orders with the primary source of supply.
4) The Safety Stock Quantity. This is reserve inventory you will have on hand to protect against
stockouts due to unexpectedly high demand, or delays in receiving the replenishment shipments.
Replenishment Parameters for Products with Anticipated Recurring Usage
For items with recurring usage, you should initially place an order that will cover your needs during the
order cycle, plus your safety stock quantity. The safety stock quantity is subjective, dependent on how
much “insurance stock” you want to maintain to protect against stockouts. Many organizations will start
with a safety stock quantity equal to half anticipated demand during the lead time, not to exceed a thirtyday supply:
[(Monthly Demand ÷ 30) * Order Cycle Days] + [(Monthly Demand ÷ 30) * (Anticipated Lead Time
Days ÷ 2)]
You then need to establish a reorder point or minimum quantity for these items by adding anticipated lead
time usage to the initial purchase quantity. This will let you know when you will need to reorder the
product after the initial shipment has arrive:
[(Monthly Demand ÷ 30) * Order Cycle Days] + [(Monthly Demand ÷ 30) * (Anticipated Lead Time
Days ÷ 2)] + [(Monthly Demand÷ 30) * Anticipated Lead Time Days]
The actual quantity you order once the Net Available Quantity (On-Hand – Committed + On
Replenishment Order) falls below the minimum stock quantity will be equal to the greater of the
economic order quantity or vendor package quantity. Please see other EIM articles for methods of
calculating the replenishment quantities.
Replenishment Parameters for Products with Anticipated Sporadic Usage
As we stated above, the person requesting the product be stocked must specify the quantity that will be
normally sold or used in one transaction. Determine the multiple of this normal transaction size you will
want to keep in inventory based on the anticipated lead time and order cycle for the supplier of the
product.
If the sum of the anticipated lead time and order/review cycle is fairly short, say three to five days, you
might want to keep only one normal usage quantity in stock. That is, the target stock level would equal
one normal usage quantity. Maintain the target stock level in the minimum stock quantity or reorder point
field in your system. When your net available quantity dropped below this level, you would reorder the
product. If the sum of the anticipated lead time and order/review cycle is longer (e.g. several weeks or
months), you might want to set the minimum stock quantity or reorder point to two or three times the
normal stock quantity. You also might want to maintain a higher multiple of the normal sales/usage
quantity if the item was critical to customer service, and you wanted to maintain safety stock for the
product.
The reorder quantity for an item with sporadic usage would be the quantity necessary to bring the net
available quantity up to the minimum or reorder point, rounded up to the next multiple of the vendor
package quantity. That is, the quantity the vendor requires you to buy.
Organizations are continually introducing new products. Buyers and computer systems have no past sales
or usage history for helping them determine how much of these products to buy and when to reorder
them. By following the rules we have discussed in this article, you can make good decisions that will
lead to having these products available for immediate delivery to your customers while not overstocking
them.