Setting a reorder point can help you make sure you never run out of inventory. The reorder point formula is key to determining when you need to replenish products, and is the focus of this article. The reorder point tells you when to reorder inventory, so that you won’t run out of stock. It usually triggers the purchase of a predetermined amount of replenishment inventory. If the purchasing process and supplier fulfillment work as planned, the reorder point should result in the replenishment inventory arriving just as the last of the on-hand inventory is used up. The result is no interruption in production and fulfillment activities, while minimizing the total amount of inventory on hand.
Lightspeed POS makes managing your business easier with automatic low stock notifications and automated reordering. Let’s take a closer look at each component of the reorder point formula. If you run a shoe store, for example, you may have different reorder points for different sizes of shoes, depending on how quickly they sell.
How do you calculate a reorder point?
When establishing a reorder point, you want to avoid repeatedly pulling from your safety stock. An effective reorder point ensures that your business keeps flowing— it helps you fulfill orders quickly, protects your margins, and keeps customers happy. Reorder points are vital to keeping your business running smoothly, but they’ll only work if you’re prepared to reorder on time. If we total those numbers, we get 180 total units sold over the past 90 days.
- Once inventory dips below the calculated reorder point, replenishment is triggered through a new purchase order.
- Average delivery lead time is the average amount of time it takes for a shipment to arrive from the time the order was placed.
- This means a close understanding of your carrying costs, storage capacity, and, most importantly, your customer buying habits.
- Incorrectly managing your inventory comes at a steep price and the likelihood of this happening increases as your portfolio grows.
- Determine if you’re targeting the right demographics or placing the appropriate amount of promotion behind a product.
- If you don’t keep an eye on inventory levels, you might forget to place a new order in time for it to arrive before you run out of stock.
You divide the number of lamps you sold by the number of days in the month (91/30), and learn that you sell about three lamps each day, on average. If you have too much inventory on hand, you’ll be able to meet customer demand. However, you’ll have too much cash invested in inventory and therefore may not have enough funds to use on other parts of your business that may need more pressing attention. In this formula, lead time demand is calculated by multiplying the average number of units sold per day by the average lead time in days.
What are ROP and EOQ?
If your business falls into this category, consider the benefits of inventory management software. If you have at least one procurement cycle and one sales cycle worth of data, you can start using the reorder point formula to improve your inventory operations. By reordering a predetermined amount of replenishment inventory according to demand forecasts, you can avoid sunk costs from inventory shrinkage and obsolescence. Regularly calculating reorder points removes the mystery from inventory cost control and helps your business maintain optimal service levels. Even if there are production shortages or shipping delays, Archon Optical’s safety stock ensures they can sell Ghost glasses for two more weeks before running out of stock.
By knowing how much you sell on an average day, you can set more accurate reorder points. Understanding customer demand helps you set a reorder point that aligns with actual buying patterns, so you neither overstock nor run out. Having an adequate safety stock level means you’re which one of these would not be a factor in determining the reorder point? covered when those unexpected scenarios pop up. It gets factored into your reorder point to make sure you’re always prepared. This real-time tracking helps to optimize your replenishment cycles based on average demand, reducing the likelihood of overstocking or understocking.
Key components of the reorder point formula
With automations like this in place, you can spend more time doing the things that only you can do for your business. 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. While your lamp manufacturer quotes a lead time of five to 10 days, you’ve noticed that it actually takes closer to two weeks for your store to receive a new shipment of lamps. Better yet, consider using a just-in-time or material requirements planning system, which only order new inventory when there is a specific, identified reason for doing so. By doing so, you confirm you have enough stock to cover the sales during the lead time, plus an additional safety stock to cover unexpected demand or supply delays. In the context of inventory management, lead time is the amount of time it takes for a new order to be delivered to your warehouse once you’ve placed a purchase order.