Whether you’ve just started a new business or you’ve sold products for years, anyone can benefit from using the reorder point formula. This post will show you what that is, why it’s useful, and which numbers you’ll need to generate a reorder point.
How to calculate your reorder point
The reorder point (ROP) is the minimum stock level a specific product can reach before you’re prompted to order more inventory. But I’m sure you already knew that!
A reorder point is not a static number. It’s based on your own purchase and sales cycles, and it varies on a per-product basis. However, once you have a handle on the patterns of a product, you’re ready to start putting the variables together.
The reorder point formula is daily unit sales multiplied by delivery lead time, with some safety stock for good measure.
The reorder point formula video
If you’re the type who likes to watch instead of read, we’ve created a video version of this post. The examples are a little different, but the formula is exactly the same. Peter covers the reorder point formula in just three minutes:
Calculating average daily unit sales
OK! Back to the post at hand. The first variable is simply the average amount of that product you sell on any given day. Let’s examine the fictional company, Archon Optical, and their Ghost glasses. Here are the sales of the Ghost over the last three months:
If we total those numbers, we get 180 total units sold over the past 90 days.
That means that the average daily sales for the Ghost is 2 per day.
Calculating average delivery lead time
Average delivery lead time is the time it usually takes for product shipments to arrive. You should have a couple of purchase orders on-hand to check the numbers. Delivery times can vary based on the quantity you order (larger orders could take longer to ship). When you place the order also affects the lead time (compare orders during a busy season versus a slow season). There are different ways to calculate this, but a three-month average is a good start.
Here are a few Archon Optical purchase for the last three month of Ghost shipments:
Add the total delivery time (15 days ) and divide it by the number of orders (3 orders). That’s an average lead time of five days for the product to arrive.
In this example the lead time is calculated on the vendor level not at the item level. It does not account for multiple receiving locations and or different lead time per item.
How to calculate safety stock quickly
Safety stock is similar to a reorder point, but it’s a surplus quantity to ensure that you don’t run completely out of stock if there are delays.
When deciding on a safety stock level you’ll want to consider: average daily sales and the daily average that product used in work orders (if applicable). Lead time is also important to safety stock.
We’ll keep things simple by calculating based on two weeks of extra demand (14 days). This number is an estimate based on what we’ve seen from other small businesses. But keep in mind this number will vary. If you’re dealing with a product that has a shelf life, such as food, you should try considering changing safety stock levels to days instead of weeks.
Since the average daily sales for the Ghost are 2 (as calculated earlier on this page), that means the safety stock for Ghost is about 14 x 2 = 28.
[We’ve also written a more detailed article on safety stock, if you’d like to calculate it based on lead-time demand.]
Putting the reorder point formula together
Now that we’ve got all of the Archon Optical numbers down, we’re ready to put together a reorder point for the Ghost.
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.
Even if there are production shortages or shipping delays, Archon Optical’s safety stock ensures that they can sell Ghost glasses for two more weeks before they run out of stock.
Set a basic reordering reminder in a spreadsheet
Reorder points are vital to keeping your business running smoothly, but they’ll only work if you’re prepared to reorder on time.
If you’re a spreadsheet user, you can use conditional formatting for the quantity value of specific cells. You can set Excel or Google Sheets so that cells turn red when they hit a reorder point. This will effectively warn you when you need to start on a new purchase order.
Reorder faster with inFlow
Unlike spreadsheets, inFlow was designed specifically for working with inventory. Quantity and reorder point fields are built into the apps. This saves our customers a lot of setup time.
inFlow Cloud has a Reorder Stock window, which identifies which products need reordering, and creates new purchase orders with just one click.
If you’d like to implement reorder points with tailored suggestions for your business, we can help with that too!
inFlow Cloud has a Recommended Reorder Point report that examines your sales data and recommends reorder points for your products. It also factors in goods in transit (GIT), which are products that have been ordered from a vendor but haven’t been received yet.
Whether you’re just starting out with reorder points or fine-tuning them, inFlow Cloud can help!