How do you know when it’s time to reorder inventory? If you’ve set up a formula for reorder point calculation, there’s very little guesswork involved.
Reorder points are crucial in inventory management. They help you avoid backorders and shortages so that you can keep filling orders uninterrupted. You don’t always want to wait until you completely run out of an item before ordering more. Once you run out, you may have to wait on manufacturing, ordering, and shipping before you get more of that item in stock.
If you have orders to fill in the meantime, your customers might have to wait days, weeks, or even months for their item!
That’s where the reorder point comes in. There’s a formula you can use that tells you with greater accuracy when to reorder items based on your safety stock and the time it takes to receive more inventory.
Here’s what you need to know about the formula for reorder point calculations and the role it plays in your products business.
What is a Reorder Point?
Let’s say you have 1000 units of your top-selling cleaning product. You sell 5 units a day and it takes 7 business days to receive more from your vendor. How many units should you have left at the time you need to reorder?
The answer to this math problem is called your reorder point.
Simply put, a reorder point is the minimum number of units you need to fill orders while you wait for your inventory to be replenished. It depends on a number of factors, mainly your average daily sales of an item, your safety stock, and the lead time to receive more of that item.
If you sell multiple products, each one will have a different reorder point. The reorder point is tailored to the product’s unique sales and lead times.
What is Safety Stock?
Safety stock refers to your “buffer” of inventory in case of a sudden spike in demand. We saw examples of this during the pandemic with hand soap and toilet paper. Retailers sold through their stock of these items at lightning speed because everyone needed them at once.
The pandemic is an extreme example that underscores the value of safety stock. In normal cases, safety stock is used as a means to fill small bursts in demand while you wait for replenishment.
Without safety stock, retailers face a number of costly problems. For starters, not having inventory to sell means not making a sale at all. A lack of product can also lead to dissatisfaction with your brand and gives your competitors an opportunity to win your customers.
According to Retail Dive, out-of-stock issues cost retailers $1 trillion each year!
How Safety Stock Affects the Reorder Point Formula
Many retailers use a formula for reorder point calculations. This makes it easier to gauge when to restock items based on data rather than hunches. The simple formula is this:
(Daily Average Sales x Lead Time) + Safety Stock = Reorder Point
Let’s unpack this a little:
- Lead time = the time it takes to receive items once you order them from your vendor
- Daily average sales = the number of an item you sell on an average day
- Safety stock = the number of “overflow” items you keep in the event of a demand spike
There’s a formula you can use to calculate the ideal safety stock, too. To do this, you’ll need deep insight into your sales data. Find your max daily sales and your max lead time, as well as your average daily sales and average lead time. Then, plug those values into this formula:
(Max daily sales x Max lead time) – (Average daily sales x Average lead time) = Safety Stock
You will include the safety stock value in your formula for reorder point.
How to Calculate the Formula for Reorder Point
Let’s use our previous example of the cleaning product here. First, we need to calculate our Safety Stock. Let’s say we found that the most we’ve ever sold in a day are 12 units, and the longest it’s ever taken us to receive a new shipment is 15 days. We already know our average is 5 units a day and a 7-day lead time. Let’s plug in these values:
(12 x 15) – (5 x 7) = Safety Stock
This turns into:
(180) – (35) = 145
We should keep 145 units of safety stock, just to be on the safe side.
Now that we know the value of our safety stock, we can set up a formula for reorder point success. It looks like this:
(7 days x 5 units per day) + 145 units safety stock = Reorder Point
Which turns into this:
(35) + 145 = 180 units
Once we only have 180 units of cleaning product left, it’s time to reorder.
Now, rinse and repeat for each of the products in your inventory to mitigate stock issues.
Automated Reorder Point Notifications with Zenventory Management Tools
Manually reviewing stock quantities against reorder points can be a time-consuming process, especially when you have a large portfolio of products.
One way to do this at scale is to use inventory management tools like Zenventory that can transform your sales data into timely insights. Zenventory lets you easily set up automated notifications when items reach their reorder point. It does all the legwork for you, including tracking individual lead times for each item and vendor in one central place.
This way, you can also reduce your risk of being out of stock on items your customers want to buy from you. Automation in your reordering process can also help ensure that you don’t end up with excess product on your shelves, keeping your capital free to invest where it will have a more beneficial impact.
Discover more about Zenventory’s automated low-stock notifications and simple reordering process. Book a demo today!