What is Reorder Point? Reorder Point Definition & Formula

Even if they don’t do so explicitly, it’s good to build in some allowance to cover uncertainty and unexpected events. If your business doesn’t have a concept of safety stock (or a similar concept that serves as a cushion in your inventory levels), you may still want a “safety stock” term in your equation. That number could serve in place of your safety stock number, or even be added to your safety stock if late deliveries are a legitimate concern. The reorder point, or reorder level, is the amount of standing inventory on-hand that triggers a reorder. Essentially, when you hit this inventory number, you should reorder products to ensure you continue to meet demand without any gaps and optimize your inventory turnover ratio. Reorder point is not a stable number, but is flexible based on sales trends and the demand cycle of a given product.

The major issue here is that you may go through this stock more quickly than anticipated. To combat any sudden shifts in demand and safety stock usage, track daily sales and recalculate your reorder points regularly. A perpetual inventory count is ideal for this, but taking an inventory cycle count is also a good choice if you still take physical inventory. Your replenishment https://www.bookstime.com/articles/how-to-calculate-reorder-points level is like your first line of defense against a potential stock-out. Safety stock provides the last line of defense that ensures you stay in stock in the event of sudden spikes in demand and unexpected supply chain problems that lead to longer lead times. Calculating and automating your reorder point will help you create an efficient inventory restocking system.

Example of a Reorder Point Calculation in Real Life (and Its Benefits)

The moment your inventory levels fall below this number, you will need to place a new order. Therefore, an ideal reorder point is typically a little higher than your safety stock level to factor in delivery time. Your inventory reorder point levels should cover every item in stock, including all different SKUs. You can link your inventory levels with each product’s bill of materials (BOM) and track it with MRP software. Finally, safety stock is the number of items that companies keep in stock to guard against stockouts that may occur due to sudden shifts in supply and/or demand.

It is similar to the fuel reserve indicator that you have in your motor car or bike so that you can refuel it before you run out of fuel while driving. So the 9 usual days of supplier delay + the 6 days of ordering delay + the 2 days from the supplier + 1 day of road delays. Exempli may sell 2.83 of these medium, blue sweaters on an average day, but some days they sell as many as 5.

Reorder point

A good forecasting demand platform should help to give you an idea of historical buying trends over a particular period for your products. It lets you know the items that are selling like hotcakes during a particular season and those that won’t. This valuable insight allows you to seize new and recurring opportunities and adjust your inventory to handle expected spikes in demand. For example, by eliminating slow-moving products, you can free up some storage space that you can use to store more hot sellers.

The delivery time and manufacturing rate are also part of understanding your manufacturing lead time. For our birthday card example, we already calculated the average sales per day and average lead time. With those numbers stored, let’s focus on maximum daily sales and maximum lead time.

What is the difference between reorder level and reorder quantity?

But let’s say there were a couple of days in the three-month calculation period where you sold up to seven cards. Businesses which follow lean inventory practices or a just-in-time management strategy usually don’t have safety stock. In such cases, your reorder point can be calculated by multiplying your daily average https://www.bookstime.com/ sales by your lead time. Typically, when you don’t have safety stock, your reorder level and the frequency of your orders tend to be higher. We’ll keep things simple by calculating based on two weeks of extra demand (14 days). This two-week estimate is based on what we’ve seen from other small businesses.

Getting your reorder level right will prevent stockouts and save you money by eliminating unnecessary carrying costs and products that sit in stockrooms and expire. The EOQ model is a simple way to determine the optimal order quantity for a company. This model takes into account the company’s sales volume, production cycle, and the cost of inventory. The EOQ is the point at which the company’s ordering and carrying costs are equal.

First, you will need to calculate the lead time demand:

The safety stock ensures you can still fulfill orders if these happen while you wait for new inventory to arrive. Knowing which products are hot items and those that are cooling off allows you to jump on new opportunities and adjust your stock to meet increased demand. The daily sales velocity, or the average number of units you sell per day, differs for everything you sell. However, factoring reorder points and safety stock into your replenishment calculations will help you better manage both your current inventory and future order quantity. Whether you’ve just started a new business or sold products for years, anyone can benefit from using the reorder point formula. This post will show you what that is, why it’s useful, and which numbers you’ll need to generate a reorder point.

When you know your reorder point, it’s easier to determine what to order, in what quantity, and when. You can then automate this repetitive process through inventory management programs like SoStocked, which allows you to set your minimum and maximum stock (in days or units). There’s a simple formula that businesses can use to determine the reorder point for a product, taking into account customer demand and vendor delivery times. Your safety stock is the buffer you have in place in case of unforeseen stock issues, such as a sudden increase in demand, issues with suppliers, or any other supply chain disruption. To get an optimal safety stock calculation for a particular product, you’ll need to do three basic calculations. Holding the optimal amount of stock in storage at any one time is more difficult than it sounds.

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Determine if you’re targeting the right demographics or placing the appropriate amount of promotion behind a product. In many cases, a broader view beyond an inconsistent set of numbers will get your product moving again. Even if running on automated software, it’s wise to review your processes and verify everything is operating as intended. Your suppliers might also carry their pressure points that can change at any moment.

• Calculating your optimal reorder level for each product can help you to give your customers a consistent high level of service.
• Calculating ROP for each product can be time-consuming and challenging, especially if your inventory is patched together from several suppliers or you sell lots of products.
• Simply fill out the fields and click the Calculate button to determine your reorder point.
• Reorder points come from a wide range of stock and purchase factors – think daily average sales.
• Average Daily UsageBefore the store managers can determine their reorder point, they need to figure out how many bottles of orange juice they sell every day.
• This inventory should not be reordered and you should offload it to make more room for profitable goods.

That may seem like a lot of metrics and maths to take in at once, but we’ll break everything down in the coming sections. First, let’s examine the importance of the formula and how you can use it in your business. Mattias is a content specialist with years of experience writing editorials, opinion pieces, and essays on a variety of topics. He is especially interested in environmental themes and his writing is often motivated by a passion to help entrepreneurs/manufacturers reduce waste and increase operational efficiencies. He has a highly informative writing style that does not sacrifice readability. Working closely with manufacturers on case studies and peering deeply into a plethora of manufacturing topics, Mattias always makes sure his writing is insightful and well-informed.

Some retailers are wary of the additional cost of working with a marketing automation company. In an ideal world, your product would always arrive on time, and your orders would always be placed with no delay. Either you have to carry that inventory, let’s say from today to tomorrow, or let’s say from this week to next week, or this month to next month – and inventory holding is always costly. Or, in some cases, such as fresh food, you will have to literally throw away the food at the end of the day, because you cannot keep it tomorrow or next week or next month,” Nasiry says. A grocery store, for example, would likely have higher reorder points for quick-selling produce than a furniture store would for slow-selling mattresses.