The Reorder Point Formula: All You Need to Know + Video

Meredith Flora is a Content Marketing Manager at ShipBob specializing in supply chain management, logistics, and ecommerce fulfillment. She holds a BA in Communications and Public Relations from Virginia Tech, and brings 4+ years of expertise in supply chain content marketing. Meredith has authored 200+ blog posts, 20+ merchant case studies, and 10+ eBooks for ShipBob. She has also written content for Arka, Adquadrant, Okendo, and Tydo, establishing herself as a thought leader in logistics and fulfillment strategy.

By understanding the reorder level, using the formula, and implementing best practices, businesses can prevent stockouts, meet demand, and boost overall customer satisfaction. Yes, you can use reorder point calculations for seasonal or fluctuating demand. Failure to adjust those key variables won’t give you an accurate ROP when demand increases. Businesses which follow lean inventory practices or a just-in-time management strategy usually don’t have safety stock.

By doing this, you ensure customers get their orders on time and have a positive brand experience. That’s why ecommerce businesses rely on the reorder quantity formula. Similar to an economic order quantity (EOQ), you are trying to find the optimal order quantity to minimize logistics costs, warehousing space, stockouts, and overstock costs. Where safety stock is not required, omit it from the inventory management reorder point formula. In low-risk environments, businesses reap the benefits of lower on-hand inventory.

Finding the rhythm in manufacturing capacity planning: Level up your processes

Stockouts lead to longer wait times for customers, which nobody likes. It becomes especially crucial when handling products with diverse seasonal demands, shelf lives, or supplier conditions. Harnessing advanced forecasting techniques is akin to having a sales climate forecast at your fingertips. Techniques such as time-series analysis, causal models, and machine learning algorithms offer deeper insights into customer demand trends and seasonal variations. If you’ve ever dealt with the hassle of running out of stock or the headache of having too much, you understand the importance of nailing inventory management. Imagine you have a dog accessory business that sells bandanas in different colours .

• ➡ According to the 20/80 or Pareto analysis, 20% of the items in stock at Martin Med represent 80% of the value of the stock.
• In summary, case studies demonstrate that the reorder point formula isn’t just theoretical—it’s a powerful tool used by businesses of all sizes to optimize inventory levels.
• In this section we break down ROP and tell you exactly how to calculate it.
• This method is used by businesses that keep extra stock on hand in case of unexpected circumstances.

Delays with your suppliers create headaches with your inventory management, resulting in a scarcity of your product. If it’s a sought-after item, these delays can often come at the worst possible time. The reorder point varies from product to product and is primarily influenced by two critical factors – daily sales velocity and lead time. By implementing and maintaining safety stock and reorder points, you can enhance your overall inventory management system. Keep in mind that this method may lead to higher inventory costs due to considering maximum sales and lead time. To be cautious, consider setting a percentage cap to account for possible delays in goods delivery.

This is why many manufacturers and managers turn to cloud manufacturing software, like Katana, to help them automate their reorder points. Using the reorder point formula, you can calculate that your reorder point is 120 units. The moment your inventory levels fall below this number, you will need to place a new order. The average lead time in days is how long it takes for your raw materials to be delivered from a supplier or how long it takes you to manufacture a product. The delivery time and manufacturing rate are also part of understanding your manufacturing lead time. Next, let’s look into how to calculate reorder point with the reorder point formula.

• It also saves you money long-term by trimming inventory with lower sales.
• To calculate the average daily usage you need to calculate the average number of sales of a product per day.
• Lead time is super important for figuring out your reorder point because it tells you when your new stock will get there.

ShipBob’s cutting-edge inventory management software and analytics tools make it easier than ever. So now you know the reorder point formula, but you might be wondering – what is demand during lead time? In this section we break down ROP and tell you exactly how to calculate it. Reorder quantity and reorder points work in tandem to achieve optimal inventory management. Once you receive a reorder point alert, you can calculate the reorder quantity to determine the exact inventory replenishment needed in your fulfillment center. Reorder quantity is the total number of product units you request from a manufacturer or supplier on an inventory replenishment purchase order.

They use historical data and statistical analysis to find the correct safety stock. If a business wants to keep five days of additional stock, it will calculate its average demand over five days and set that as the safety stock level. Five days stock at average demand is 1,000 units so they will set their safety stock at 1,000. Safety stock is a buffer to protect the business from demand and lead time variability. With no demand fluctuations, damage, or seasonality, and perfectly timed lead time you could confidently exclude safety stock.

Once the new order is received in your warehouse, the stock level returns to the maximum level of 3400 bottles units. While businesses what is reorder point calculate the reorder point formula have an official lead time from suppliers in their service level agreements, the exact number can vary from time to time. If their SLA says 5 days, they more often than not deliver within 2 days. The average daily unit sales is simply how much you sell each day on average.

Fluctuating Demand

Release capital invested in inventory and use it to fund new projects and grow your business. The ROP in inventory management triggers the next order and should balance your stock at the ideal level. The right inventory level balances the stockout risk with the cost of holding surplus inventory. Your reorder point is a critical factor, along with safety stock, in the larger scheme of inventory management and your supply chain. Once you have your safety stock number, you can then plug it into the reorder point formula for insight into your reorder levels.

If your order doesn’t arrive on time, it can delay manufacturing, resulting in idle workers, increased manufacturing costs, lost sales and reduced productivity. If your order arrives too early, you could incur additional inventory storage costs. While it is technically possible to use Excel to manage your reorder points, it’s not good business practice and will quickly become a pain point. Growing product businesses should manage their stock using reliable inventory management software. This creates one source of truth for data and enables effortless data analysis and collaboration. 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.

It can help assess any consumer demands or preferences to help you forecast demand more accurately. For instance, with the hockey helmet example, companies are likely to see an uptick in demand in the fall and winter seasons when hockey is primarily played. The spring and summer, conversely, are likely to be the times of the year when there’s less demand for hockey helmets and other hockey equipment. Therefore, a good reorder point also needs to consider the number of ordered items left in your warehouse by the time the materials arrive. Otherwise, you run the risk of running out of stock before the reorder arrives.

Establishing reorder points frees up crucial capital and ensures your business is operating at maximum efficiency across inbound and outbound logistics. Reorder point calculation includes average demand, lead time, safety stock, seasonal factors, and service level requirements. By calculating ROQ with these factors, you can maintain steady stock levels and minimize the risk of stockouts and overstocking. Combined with demand forecasting, an effective reorder quantity is an important facet of stock control. A reorder point, or ROP, describes a period when inventory needs to be restocked so your company doesn’t run the risk of running out of supply.