As your business grows, the complexity of managing stock levels increases. Without careful planning, you could either end up with too much inventory or, worse, run out of stock when you need it most. This is where reorder points come in. By setting reorder points for your most crucial SKUs (Stock Keeping Units), you can figure out the exact moment to reorder before you deplete your stock. The goal is to have the right amount of stock at the right time, ensuring you don’t face stockouts or excessive inventory costs.
In this post, we’ll break down what reorder points are, how to calculate them, and how they help you maintain smooth business operations, all while avoiding the pitfalls of poor stock management. We’ll also dive into some examples and offer practical tips for implementing reorder points in your business.
The Role of Reorder Points in Effective Inventory Management
Reorder points are essentially a stock level threshold that helps you know when it’s time to replenish an item before you run out. Think of it as a safety net for your inventory.
Here’s why setting reorder points is essential for your business:
- Ensure Timely Restocking: A reorder point ensures that you never run out of stock. By calculating the optimal reorder time, you can place orders with enough lead time, ensuring products are available when you need them.
- Avoid Overstocking: Overstocking is just as dangerous as running out of stock. When you stockpile too much inventory, you tie up cash flow, incur additional storage costs, and may even see your products become obsolete or expire. A well-calculated reorder point helps balance these risks.
- Maintain Customer Satisfaction: Running out of stock can lead to customer frustration, missed sales, and poor reviews. By using reorder points, you ensure that you have the right inventory levels to fulfill customer orders on time, every time.
- Streamline Production: For manufacturers, reorder points help ensure that production lines keep running without interruptions due to a lack of materials. With the right stock on hand, production flow remains efficient.
What’s the Reorder Point Formula?
The reorder point formula helps determine exactly when you need to order more stock to avoid running out before the new stock arrives. It’s based on three key factors: average daily usage, lead time, and safety stock.
The reorder point formula is:
Reorder point = (Average daily usage x Average lead time in days) + Safety stock
Let’s break down the elements of this formula:
- Average Daily Usage: This is the average amount of stock you use or sell each day. It’s based on historical data, so you’ll need to analyze your sales or usage patterns over time.
- Lead Time: Lead time is the amount of time (in days) it takes from placing an order to receiving the products. You need to account for how long it will take for your supplier to deliver the goods to your business.
- Safety Stock: Safety stock is the buffer inventory you keep in case of sudden demand spikes, unexpected supply chain delays, or other disruptions. It’s an insurance policy to prevent stockouts during unforeseen events.
Step-by-Step Guide to Calculating Reorder Points
Let’s take a look at how to calculate reorder points step by step, using a new real-world example.
Step 1: Determine Your Safety Stock
First, you’ll need to calculate your safety stock. The safety stock formula is:
Safety stock = (Maximum daily usage x Maximum lead time) – (Average daily usage x Average lead time)
For instance, let’s say Tom runs a small pet supply store, and he needs to determine his reorder point for dog food. Tom knows that:
- His maximum daily usage is 15 bags of dog food.
- His supplier’s maximum lead time is 4 days.
- On average, Tom sells 8 bags of dog food per day.
- His supplier’s average lead time is 2 days.
Using the safety stock formula, Tom can calculate his safety stock as follows:
Safety stock = (15 bags x 4 days) – (8 bags x 2 days) = 38 bags of dog food
Step 2: Calculate Your Reorder Point
Now that Tom knows his safety stock, he can calculate his reorder point using the main formula:
Reorder point = (Average daily usage x Average lead time) + Safety stock
For Tom’s pet supply store:
Reorder point = (8 bags x 2 days) + 38 bags = 54 bags of dog food
This means that when Tom’s stock of dog food falls to 54 bags, it’s time to reorder more from his supplier.
Using Excel to Calculate Reorder Points
If you’re still managing inventory using spreadsheets, Excel can help you calculate reorder points, though it’s not always the most efficient method for growing businesses. Here’s how to calculate reorder points using Excel:
- Set Up a Table: Create a table with columns for the product name, average daily usage, lead time, safety stock, and reorder point.
- Use Formulas: In Excel, you can use a formula like =SUM(F2+G2) where Column F contains the safety stock figure and Column G contains lead time demand.
- Apply Conditional Formatting: Set up conditional formatting to highlight when stock falls below the reorder point. This helps you visually identify when it’s time to reorder.
While using Excel can work for small businesses, once your stock levels and product range increase, using Mindx Inventory is a more efficient option. Mindx Inventory automates the process, reducing human error and offering real-time stock alerts and updates to ensure you never miss a reorder point.
Example 2: Reorder Points for Retail & Distribution
In a retail or distribution business, instead of daily usage, you’ll calculate reorder points based on average daily sales. Here’s an example:
Let’s say Maria runs a clothing boutique and needs to know the reorder point for her best-selling shirts. She knows that:
- She wants 100 shirts as safety stock.
- She sells, on average, 50 shirts per day.
- Her supplier has a lead time of 10 days.
Using the reorder point formula:
Reorder point = (50 shirts x 10 days) + 100 = 600 shirts
This means that when Maria’s stock of shirts drops to 600 units, it’s time to place an order with the supplier.
Understanding Lead Time & Safety Stock
Lead time is one of the most important variables in the reorder point formula. It’s the time it takes from placing an order to receiving your stock. Accurate lead time management helps ensure that your products are always available when needed and prevents delays that could halt production.
To optimize lead time:
- Order More Frequently: Instead of placing large orders less frequently, consider ordering in smaller batches more often to reduce the time it takes to replenish stock.
- Source Locally: Working with local suppliers can cut down on shipping times and costs, ensuring quicker deliveries.
- Use Technology: Implementing Mindx Inventory that integrates with procurement systems can streamline the ordering process, ensuring that orders are placed automatically when the reorder point is reached.
Safety stock acts as a cushion to prevent stockouts. It’s calculated based on your maximum expected usage and lead time, and it accounts for uncertainties in supply and demand. While you aim to keep inventory costs low, safety stock ensures you’re prepared for unexpected fluctuations.
Is Every SKU Important for Reorder Points?
Yes! Each product or SKU should have its own reorder point. This allows you to:
- Monitor Demand Trends: By calculating reorder points for each product, you’ll gain insight into which items are performing well and which aren’t, enabling more strategic inventory management.
- Improve Cash Flow: Maintaining optimal stock levels for each SKU helps ensure that your capital is tied up in inventory that’s actually selling, rather than collecting dust on the shelves.
- Make Smarter Business Decisions: By tracking reorder points, you gain valuable insights into sales patterns and customer preferences. This data can guide purchasing decisions, promotional strategies, and other critical business decisions.
Reorder Points Are Key to Efficient Inventory Management
Reorder points are not set in stone. As your business grows, demand fluctuates, and supplier lead times change, your reorder points should be reviewed and updated regularly—typically every 3 to 6 months. This helps you stay ahead of the curve, avoid stockouts, and optimize inventory.
Using a robust inventory management system like Mindx Inventory makes the process of tracking and calculating reorder points much easier. The software automates the process, giving you real-time visibility into your inventory levels and allowing you to reorder stock with a single click.
By utilizing reorder points effectively with Mindx Inventory, you’ll maintain smooth operations, keep customers happy, and make smarter, more informed business decisions.
Book a demo with Mindx Inventory today and discover how our powerful system can simplify your inventory management, reduce errors, and optimize your reorder process!