How to Calculate Reorder Points to Avoid Stockouts

InFlow Cloud has a Reorder Stock window, which identifies which products need reordering, and creates new purchase orders with just one click. Managing, ordering, and tracking inventory efficiently helps keep customers happy and boost your bottom-line profits. Having the right Inventory management system simplifies your responsibility. To save time on calculations, you can use our free reorder point calculator after working through the below explanation.

What is the reorder point formula?

Reaching the reorder point triggers the replenishment process, ensuring that stock is available before it depletes. Therefore, when the store’s inventory level reaches or falls below 378 units, it’s time to reorder and restock the product. First you want to determine your demand during lead time by multiplying your daily sales by the lead time.

Set a basic reordering reminder in a spreadsheet

Once you keep the minimum inventory and the safety stock number, you don’t face stock issues with daily sales velocity. The purpose of the ROP is to ensure that the business initiates the reorder process at the right time, preventing stockouts and maintaining a smooth supply chain. It helps strike a balance between avoiding stockouts and minimizing excess inventory. On the flip side, maintaining excess inventory ties up capital and incurs additional holding costs. By setting the ROP at an optimal level, businesses can strike a balance between avoiding stockouts and minimizing excess inventory, leading to cost savings. By setting an appropriate ROP, businesses can avoid stockouts, which can result in lost sales, dissatisfied customers, and damaged reputation.

Why do businesses calculate reorder points?

The software can streamline your reordering processes among a lot of other operational tools. Knowing which products are hot items and those that are cooling off allows you to jump on new opportunities and adjust your stock to meet increased demand. The daily sales velocity, or the average number of units you sell per day, differs for everything you sell. Avoiding using your average daily sales because the perfectly fine inventory on a Monday may be insufficient on a Friday morning because of the busy weekend. Once you calculate reorder point and equip the buffer stock, you can ensure on-time deliveries for your customers and a quality customer experience. About 35% of consumers will cancel their order if the delivery time is too long.

How To Automate Your Reorder Point Calculation

  1. The reorder point is like a signal telling you it’s time to order more.
  2. Inventory is a crucial part of any business and the reorder point is an important part of managing that inventory.
  3. ShipBob is an order fulfillment solution that features built-in inventory management software, giving you precise control over your inventory.
  4. When the stock level falls below the reorder point, it triggers the need to replenish the stock by placing an order with suppliers or manufacturers.

Small businesses can use the reorder point formula to calculate when items need to be replenished before their inventory levels hit zero. Using this inventory management tool can help avoid an unwanted out-of-stock message for your customers, which can often be disruptive to their shopping experience. The store experiences an average daily demand of 20 gadgets, and it takes an average of 5 days to receive new inventory after placing an order. The store also maintains a safety stock of 50 gadgets to account for unexpected fluctuations in demand and potential delays in order delivery.

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. The reorder point is key for business owners to determine how much safety stock a business should keep on hand as a buffer for excess demand. Factoring reorder point and safety stock into your replenishment calculations will help you better manage both your current stock and future order quantity.

This means you need to have an understanding of each product’s inventory levels and sales to optimize its reorder point. This is easily done using inventory management software that tracks everything you need to know about your inventory. Another reason reorder underlying profit point can improve your company’s inventory control strategy? You won’t feel the need to “pad” orders with extra inventory once you calculate an item’s reorder point. After all, you know you’ve already baked safety stock and lead time into your reorder point.

Safety stock is the extra inventory that a company keeps on hand to avoid stock outs. The goal is to find the perfect balance of inventory levels so that you have enough stock to meet customer demand without tying up too much capital in inventory. Modern inventory management systems like Uphance can automate much of the process, from calculating reorder points based on real-time sales data to notifying you when it’s time to reorder. When the quantity on-hand for Ghost glasses hits 38, Archon Optical knows to place a purchase order for more. Because they’ve built an average delivery lead time into the reorder point, the extra Ghost glasses should arrive before Archon ever dips below the amount of safety stock. Let’s say a manufacturer used 10 units of a component on their busiest day of production.

To maintain an accurate reorder point, check the underlying metrics — average daily sales/usage and average lead time — at least once per quarter. If you have a high season and low season, or seasonal bad weather that slows down deliveries, factor this in. Safety stock is the amount of inventory a business holds to mitigate the risk of shortages or stockouts. The safety stock calculation is the difference between the maximum daily sales/usage and lead time, and the average daily usage and lead time. Shopify POS, for example, calculates ideal reorder points for products based on supplier lead times and the average number of sales per day. This ensures you know which products are running low on stock and have enough lead time to replenish inventory before quantities reach zero.

The EOQ is the point at which the company’s ordering and carrying costs are equal. The reorder point is important because it helps businesses in keep your inventory in a balanced levels which to minimize costs, maximize profits, and business capability. Stockouts can lead to lost sales, unhappy customers, and a hit to the business’s reputation.

But you must ensure you use the ROP calculations and formula accurately to avoid miscalculations and future troubles. Find out when to order more inventory without running out by calculating your reorder point (ROP). Stock Replenishment and ROP are closely related concepts in inventory management, but they refer to different aspects of the inventory control process. It’s important to keep adequate safety stock on-hand as demand can increase suddenly or problems with a supplier can prevent you from restocking inventory as quickly as you expected. Safety stock, as the name suggests, is the extra “just in case” inventory you keep on hand to anticipate variability in demand or supply. For example, lead time might be longer in the summer due to vacations, or shorter in the winter due to holiday orders.