It’s an important concept because it helps businesses understand the average time it takes to turn their inventory into sales. The reorder point formula helps you figure out the perfect time to order more stock by taking into account production and shipping times for your products. This way, you reorder only when you need to, avoiding extra costs from too much inventory or missed sales from running out. Ideally you want to set your reorder points so that you always receive new deliveries just when you hit your safety stock level. You also want the reorder quantity to reflect demand, stock on hand and stock on order – see the graph below.
This creates one source of truth for data and enables effortless data analysis and collaboration. The more your business grows the more difficult it is to maintain ideal stock levels across your products. Setting a reorder point for your most important SKUs helps you determine when to replenish your stock, so that you have neither too much nor too little of any given item. A carefully calculated reorder point is therefore critical to good stock control, and keeps your key metrics looking healthy for your next inventory report. The reorder point calculation takes into account delivery lead time from suppliers.
Reorder Point Strategies
Finally, we’ll also discuss how inventory management software can help you automate reorder point-related tasks. Understanding how to calculate an item’s reorder point is essential for any business that doesn’t want to run out of inventory. An item’s reorder point determines a product’s absolute minimum inventory levels, becoming a “trigger point” at which a business reorders more stock. However, supply and demand can fluctuate, and outside factors can impact lead time. To account for this, the reorder point typically includes safety stock as a buffer. Managing inventory is a critical yet tedious part of running a retail business.
If you’ve ever experienced the inconvenience of stockouts or the financial drain of overstocking, you know just how essential good inventory management is to your business. ShipMonk’s industry transforming fulfillment software provides order, inventory, and warehouse management that is both powerfully robust and completely user-friendly. Orders coming from multiple sales channels are prioritized and routed, while inventory distributed how to calculate reorder points across multiple fulfillment centers can be tracked and managed in real time. Software tools can also collect and present purchase orders, sales fulfilment, and demand forecasting data on a single-user dashboard. Reorder point means the manufacturer should reorder this component when the stock falls to 150 units. By doing so, the company can prevent stockouts and avoid dipping into safety stock while they wait for new stock to arrive.
Periodic reorder point planning
However, this can create a big headache for buyers and increase the margin for error when reordering. To accurately calculate reorder points, you’ll need strong sales volume records and trends over a certain period. As you build this body of data, you can improve forecasting to meet customer demand better. Calculating your inventory fill rate will also help you forecast the rate at which your business can fulfill orders to meet supply and demand.
- The longest time it would take the supplier to deliver this component is 15 days.
- With that in place, your POS will alert you when you’ve reached that point and need to place a new order.
- With this information readily available, inventory managers can avoid wasting time manually searching through spreadsheets and crunching numbers.
- You can avoid sunk costs from inventory shrinkage and obsolescence by reordering a predetermined amount of replenishment inventory according to demand forecasts.
- So, if you get your ROP right, you’re not going to run out of products.
- Let’s say our max daily orders are 20 hoodies, and our max lead time from the hoodies supplier is 7 days.
The reorder point is the threshold which defines when an order needs to be placed and the time between each order varies depending on demand. The reorder quantity is a fixed amount (the difference between the min and max value). For example, you order 200 items with a six week gap, then 200 items with a three week gap, etc. If you sell more than one product category in your eCommerce store, you’ll likely have more than one supplier. Different vendors have different lead times, so you’ll need to calculate reorder points for each product category separately.
Reorder Point Calculator
This formula considers both the expected demand during the lead time and the safety stock needed to prevent stockouts due to fluctuations in demand or delays in order fulfillment. Regularly calculating reorder points removes the mystery from inventory cost control and helps your business maintain optimal service levels. The last thing you want to do is forget to place an order when you reach your reorder point and not be able to meet customer demand. Next, you need to know your delivery lead time, which simply means how long it takes for the shipment to get to you from the time you place the order. Cross reference vendors’ estimated shipping speeds with how long past deliveries have taken to reach you for the most accurate data.
It also helps avoid the profit loss from placing orders too early, which can cause the stock to pile up. If you’ve run out of stock during the transit and your customers have to wait for more than what you promised during the purchasing process, they’ll cancel and go elsewhere. With the rising customer demands, these ineffective methods can result in business losses and minimize your chances of business success. Let’s look at how to calculate a reorder point both with and without safety stock. Then we’ll cover how to handle reorder points when you have multiple vendors.
As the name suggests, safety stock refers to the excess products you keep on hand in case of an emergency or supply chain failure. Businesses try to forecast future sales and manage inventory according to those predictions but not everything goes to plan. Safety stock is there to make sure you don’t run out of items if your forecast isn’t accurate. If you don’t use safety stock and your sales vary greatly day-to-day, replace average daily usage with daily maximum usage (more on finding maximum daily usage later). The longest time it would take the supplier to deliver this component is 15 days. And let’s assume that the average daily use is 1.5 units, and the average lead time is 12 days.
