Any business carrying inventory must pay careful attention to raw material/product reorder points to ensure an adequate supply of raw materials is on hand to meet demand. The reorder point is the inventory quantity that triggers a purchase order to suppliers, the lowest amount of inventory the company can withstand without experiencing shortages. Some businesses choose to work with the least amount of inventory possible and use an economic order quantity when they create purchase orders.
The Reorder Point Formula
When calculating the reorder point, the business must account for the rate of consumption and lead time from vendor. The alternative means running the risk of stockouts and missing out on sales. Ordering more product than you need can also result in lack of storage space as well as unnecessarily tying up cash in stock.
If you want to know how to calculate the reorder point, the formula for reorder point calculation is, quite simply, the sum of the lead time demand and safety stock. When you manage your inventory with SOS Inventory software, SOS will automatically calculate them for all your materials.
If you are still working on spreadsheets, you will determine each product’s reorder point manually.
Q: What is a fixed reorder point?
A: If you order the same amount of inventory in the same period of time every time you order, that’s fixed reordering. This method is not feasible for most business types.
Q: What is a minimum or maximum reorder point?
A: The minimum reorder point is the least amount of inventory you can have on hand in order to replenish inventory before running out. The quantity to be ordered is the amount it takes to reach the maximum quantity when added to the minimum amount.
Q: What is periodic reordering?
A: If demand is relatively the same throughout the year, theoretically your business can replenish inventory after the same period of time passes each time you order.
Q: What is dynamic reordering?
A: Demand can fluctuate throughout the year and ordering behavior must update to stay in line with demand. Dynamic reorder points can be determined by periodically recalculating minimum quantity levels according to increases in sales or predictions based on historical data.
Q: How often should you update your reorder point?
A: If your products are in greater demand at certain times of year more than others, yours should be updated to reflect these changes. If your product demand changes with trends, you can perform analysis into sales data at the end of the month and make adjustments to your reorder level accordingly. Communicating with your buyers should also inform purchase order behavior.
Q: What is the difference between the reorder point and safety stock?
A: It refers to the level of stock that triggers a reorder, either manually or automatically. Safety stock refers to extra stock kept to cover the average amount of goods sold during the time it takes to ship an order.
First, you will need to calculate the lead time demand:
The lead time is the average number of days it takes from the time your business submits the purchase order to the vendor until the product arrives at your facility. Unforeseen events such as shortages, broken equipment, inclement weather, and road work can cause variances in delivery time. Hopefully, you are working with otherwise reliable vendors who ship out the correct amount on time.
Lead time demand is found by multiplying the lead time by the average number of units of material your business sells each day. This amount indicates how much of the item your business is likely to consume during the lead time. Adding safety stock to this figure gives that extra measure of caution in case demand increases or something unexpected causes lead time to extend beyond the maximum.
Then you will calculate the safety stock:
Safety stock is also expressed as a number of days. We have provided instructions to do so here. Safety stock times can vary during peak seasons and may have to be recalculated periodically.
While startups can manage on spreadsheets calculating reorder points this way, the more the business grows and the greater the range of inventory, the more difficult it becomes to maintain accurate records. Rather than risk shortages or order too much and tie-up cash, the best option for most businesses is using an inventory management software system. That is why SOS Inventory is ideal for small businesses – and we’re known to help and support them, creating a platform for growth.
At the incredibly affordable price point we offer, your business will gain access to valuable inventory tools that often cost tens of thousands of dollars from the larger ERP systems.
Streamline inventory management and automatically generate purchase orders at your reorder points. SOS Inventory gives you every tool you will need to grow your business and increase profitability.