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Managing your inventory is an important part of any product-based business.
Reorder point is the level of inventory at which you need to replenish your stock. When your inventory falls to the reorder point, it’s time to buy more so you don’t run out.
Knowing the right time to order stock helps your business be cost-effective. If you run out of stock, you’ll be unable to make sales until new inventory arrives. Customers will get frustrated and may never return. By contrast, ordering stock too soon is detrimental because you have to store that stock, which increases your holding costs.
The reorder point formula lets you optimize your inventory ordering so you can meet demand without every running out.
Easyship can help you automate much of your inventory and order management with the right platform integration and 3PLs. We offer the right platform integrations and direct partnerships with a global network of trusted warehouses and 3PLs with powerful inventory management systems to automate your reorder points.
This article gives you the reorder point formula and how to calculate your reorder point.
What is Reorder Point?
A reorder point (ROP) is the level of inventory at which an action is triggered to replenish that particular inventory stock. In other words, when your stock for a certain item falls to a certain level, the reorder point, you know it’s time to buy more.
The reorder point formula allows you to find the reorder point for all products in your inventory. Calculating the point of re-ordering lets you optimize your inventory. You’ll always have enough stock to sell because you know when you’re low. And you avoid overstocking inventory, and storing that stock at cost over a period of time.
Here’s how calculating the reorder point can help your business:
- Use capital productively: Holding more inventory than necessary ties up your operating capital. You could probably find more productive uses for that money. Reorder point helps you stock only what can be sold in a given period to keep your cash flow a-flowin’. Financial flexibility is important to keeping other operations running smoothly.
- Prevent stockouts: Carrying too little stock results in a stockout. When this happens, orders get delayed or go unfulfilled because of cancellations. Rather than losing business and maybe customers as well, ROP lets you sidestep all this loss.
- Protect your reputation: Buyers tend to go elsewhere once they realize a company is unreliable. Safeguard your brand name by keeping enough stock on hand to satisfy demand.
- Minimize costs: Storing excess inventory has a very real cost, which can sink your bottom line over time. Optimizing your inventory levels means more money in your pocket.
- Demand forecasting: A reorder point is a helpful benchmark for your sales performance of certain products. This insights can give you an idea of purchasing trends among customers, and better enable you to purchase products that will drive optimal business results going forward.
How to Calculate Reorder Point
Different items sell at different speeds (sell-through rate), so you’ll need to calculate the reorder point for each individual product in your inventory. Before you can run the numbers, you need to know a few other figures:
- Lead time: The time it takes (in days) for a vendor to fulfill your inventory order
- Safety stock: The quantity of extra stock you keep on hand to avoid stockouts, if any
- Daily average sales: The average number of daily sales made for a particular item
Each of these figures is a part of the reorder point formula, which is:
Reorder Point = Lead Time Demand + Safety Stock
Now that you have the formula, let’s break it down.
Lead Time Demand
Lead time demand is the amount of stock you would sell during the period it takes for your inventory to arrive from the supplier. Demand for products doesn’t cease when you run out of inventory, after all, so you need to find how many items you would sell if stock were to run out.
Lead time demand = Lead time x Average daily sales
To calculate lead time demand, you multiply the lead time (in days) for a certain product by the average number of units sold each day.
Say it takes 5 days for a specific hoodie to arrive from the manufacturer, and you sell 10 of these specific hoodies each day.
Lead time demand = 5 days x 10 average daily sales
The second part of the reorder point formula is safety stock. As the name suggests, safety stock is the inventory you keep on hand “just in case” there’s an issue with selling or receiving your inventory.
Common reasons to keep safety stock are issues with suppliers, or surging demand for products, especially around the holidays. Anticipating the variance of demand and supply for your products is smart business.
Safety stock = (Max daily orders x Max lead time) - (Average daily orders x Average lead time)
Your maximum daily orders is the highest number of a certain item you can reasonably expect to sell in a day. Multiply this number by the maximum number of days it could take a supplier to deliver new inventory to you. Now you’ve identified the upper limits of sales vs. the time it takes to receive new stock.
Next, find the average number of items sold in a day. Multiply this number by the average time it takes for a supplier to deliver new inventory to you.
Now all you need to do is subtract the maximum value from the average value. The number you get for safety stock represents the amount of a certain item you can keep on hand in a given period to safeguard against stock outs, based on previous sales.
Let's say our max daily orders is 20 hoodies, and our max lead time from the hoodies supplier is 7 days. We've already set our average daily orders at 10, and our average lead time at 5.
Safety stock = (20 x 7) - [(10 x 5)]
Safety stock = 90
Now let’s revisit our reorder point formula:
Reorder Point = Lead Time Demand + Safety Stock
All we need to do now is add your lead time demand number to your safety stock number. Now we have the ROP for a specific item in your inventory.
ROP = 50 + 90 = 140
When we have only 140 of these particular hoodies in stock, it's time to buy more.
Calculating ROP Without Safety Stock
Not all businesses keep safety stock. For example, those following lean inventory practices or a just-in-time management strategy. If you only carry enough stock to meet current demand, you’ll need to adjust your ROP calculations around safety stock.
To calculate reorder points without safety stock, just multiply your daily average sales by average lead time. This simplifies the reorder point formula to look like this:
ROP = Daily average sales x Average lead time
Let’s return to our example of 10 hoodies of a type sold per day. We just multiply the average lead time for our inventory order, let’s say 3 days, by the 10 hoodies sold each day.
Reorder Point = 10 x 3 = 30
If you hold no safety stock, you should reorder this hoodies when you have 30 left.
Calculating Reorder Point With Different Vendors
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.
Suppose you sell shoes and shoe protectors. You rely on two different suppliers each with different lead times. Your shoe supplier takes an average of 7 days to deliver every new batch of shoes. Shoe protectors take an average of 5 days to arrive. On a typical day, you sell 5 pairs of shoes and 2 shoe protectors.
Your ROP with the shoe supplier without safety stock is:
ROP = 5 x 7 = 35 pairs
Since your supplier's lead time is seven days, you should place an order for the next batch when your stock level reaches 35 pairs. It is just enough to sell for the next seven days before your next batch of inventory arrives.
The reorder point for the shoe protector supplier can be calculated as follow without safety stock:
ROP = 5 x 2 = 10 shoe protectors
Your order for the next batch of shoe protectors should go out when you have 10 protectors in stock. This is because you have only 5 days of sales before you run out of stock. Since your supplier's lead time is also 5 days, your next batch of protectors should arrive just in time for you to continue selling without stockouts.
Calculating Reorder Point With Easyship
Reorder points are helpful figures that let you see when to replenish your inventory. Use it to avoid headaches around stockouts and over-ordering.
Easyship makes it easy to track inventory and gain visibility of all your shipments. Our all-in-one software automatically updates inventory after each shipment, helping you know exactly when to rebuy more stock. Integrating your inventory and shipping processes is a huge time-saver for businesses.
Ready to save time on managing your inventory and shipping? Create a free Easyship account.
Reorder Point FAQ
What is the difference between reorder level and reorder quantity?
Reorder point is the lowest inventory level at which new items must be purchased to avoid stockouts. Reorder quantity, on the other hand, is the amount of stock that should be ordered to replenish the inventory.
Can the reorder point be greater than EOQ?
The Economic Order Quantity(EOQ) is the number of items that a business should add to inventory with each order to minimize inventory carrying costs. While ROP determines the lowest stock level, EOQ is used to determine the size of the order. Depending on where a business sets its reorder point, the ROP can be greater than EOQ.