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Reorder Point Formula and Safety Stock: A Complete Guide

Posted by ThomasLast Updated October 13th, 2023
— 7 minutes reading

Whether you’ve just started a new business or 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.

For a quick rundown of reorder points and safety stock and their importance in inventory management, check out this short clip from our new podcast.

Secret Life of Inventory | Reorder Points and Safety Stock

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 purchase and sales cycles, and it varies by product. 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.

reorder point formula:  (average daily unit sales x delivery lead time) + safety stock

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 slightly different, but the formula is the same. Peter covers the reorder point formula in just three minutes:

The Reorder Point Formula | inFlow Inventory

Why is setting a reorder point so important? 

Before we get into the reorder point formula, let’s quickly go over the importance of reorder points. Here are some of the ways reorder points will help your business:

  • Avoid stockouts – stockouts occur when a business runs out of inventory and is no longer able to process a customer’s request for purchase. Obviously, this will lead to dissatisfied customers who aren’t going to wait around for you to restock. They’ll simply take their business elsewhere, probably for good.
  • Avoid overstock – the flip side of stockouts is carrying excess inventory. The costs associated with excess inventory add up quicker than you may realize and will eat into your bottom line. Setting up a reorder point on your products will ensure you’ve got just enough of the things you need when you need them. 
  • Reduce shipping costs – by setting proper reorder points, you can avoid the need for frequent orders, which will save you a ton in shipping costs over time. 
  • Improve forecasting – with accurate reorder points, you’ll be able to anticipate your business needs, which will ultimately lead to less rushed orders or last-minute panic buying.

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:

Calculating average daily sales to use in reorder point formula:  Jan. 65 sales + Feb. 70 sales + March 45 sales = 180 sales  180 sales / 90 days = 2 sales average

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 your order quantity (larger orders could take longer to ship). When you place the order also affects the lead time (compare orders during a busy and slow season). There are different ways to calculate this, but a three-month average is a good start.

Here are a few Archon Optical purchases for the last three months of Ghost shipments:

Calculating lead time for reorder point formula:  Jan. 80 pcs 7 days
Feb. 80 pcs 5 days
Mar. 50 pcs 3 days  15 days / 3 orders = 5 days lead time

Add the total delivery time (15 days ) and divide it by the number of orders (3). 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 or different lead times per item.

How to calculate safety stock quickly

Safety stock is similar to a reorder point, but it’s a surplus quantity to ensure 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 the product used in work orders (if applicable). Lead time is also essential to safety stock. 

We’ll keep things simple by calculating based on two weeks of extra demand (14 days). This two-week estimate is based on what we’ve seen from other small businesses. If you’re dealing with a product that has a shelf life, you should consider changing safety stock levels to days rather than weeks.

Since the average daily sales for the Ghost are 2 (as calculated earlier on this page), 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.

Reorder Point Formula:  (Average daily unit sales x delivery lead time) + safety stock  = reorder point  ex. (2 x 5) + 28 = 38

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 they can sell Ghost glasses for two more weeks before running 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.

We know it can be a pain to keep all of these formulas straight. So we decided to create a handy Inventory Formula Cheat Sheet with 7 of the most common inventory formulas.

Download your inventory cheat sheet now!

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.

inFlow helps you quickly reorder based on reorder points!

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.

inFlow can recommend reorder points based on your data.

Whether you’re just starting out with reorder points or fine-tuning them, inFlow Cloud can help! The best part is, using inFlow can help with so much more than just reorder points. inFlow integrates with over 95 different applications, such as Shopify, Amazon, and Quickbooks Online, to name just a few. If you want to set up a complete barcoding system, inFlow can do that too! Read our Ultimate Barcoding Guide to learn about barcodes and how to start barcoding your business.

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