Order too much product and you’re stuck with unsold inventory that’s tying up cash. Order too little and you may lose customers due to being out of stock. How does one solve this common conundrum?
Instead of guessing when it’s the right time to reorder product, try using the reorder point formula to maintain the right level of stock and improve your inventory management controls. While you might think your gut works best as a guide, think again. Lead times are different for many products and this can greatly impact whether you can fulfill every order.
In this post, we’ll explain what a reorder point is and how to calculate it.
What is a Reorder Point?
A reorder point is the threshold, or lowest point, of your safety stock. Your reorder point should also include the lead time you need to bring additional stock into your warehouse. Essentially, your reorder point indicates when it’s the right time to place an order for new stock.
Reorder points are an extremely important inventory management practice, which helps you to maintain the right levels of stock, thus keeping your buyers happy.
How to Calculate Your Reorder Point
To calculate your reorder point, your formula should be as follows:
Maximum Daily Usage x Maximum Lead Time (in days) + Safety Stock (in days) = Reorder Point
Let’s start with an example and use one of your best sellers, especially since you don’t want to run the risk of losing a sale of a popular item. You just might lose that customer to a competitor and they may never return to do business with you again.
Let’s say that your most popular item is a smart TV. You know that your average daily sales of smart TVs is five per day and the lead time for smart TVs is typically eight days. You have 10 smart TVs reserved within your safety stock. So, your formula would look like this:
(Maximum Daily Usage) 5 x (Maximum Lead Time) 8 + 10 = (Your Reorder Point) 50
Now, you know that when you reach a minimum of 50 units for this product, it’s time to place an order with your supplier.
Typically, your inventory management software of choice should allow you to set an alert to notify you that you’ve reached your reorder point. When that occurs, your alert reminds you it’s time to send a purchase order to your supplier. This ensures that once you hit the reorder point, your warehouse manager is reminded to place that order.
If you somehow miss that you’ve gone below your reorder point, your safety stock may be able to save you, but it depends how many orders come in until the new shipment of goods arrives. Keep in mind that your suppliers will likely charge you for a last-minute, rush order, which is one of many reasons why you don’t want to go below the threshold of your reorder point.
If you’d like to learn how Systum can help you with inventory management and more, fill out the form below.
Categories: Inventory Management