Reorder Point Formula: How to Calculate This Critical Inventory Metric
When factoring in seasonality, be sure to reference your sales and lead times from previous years. As you can probably tell, the best marketing decisions and supplier selections aren’t enough if your company’s demand forecasts are wrong. Demand planning is the process of estimating how much of a good or service customers will buy from you. It will also affect your production scheduling, or the management of the resources, events, and processes need to create an offering. For example, if demand is heavy, you might need your staff members to work overtime. A product’s lead time is the amount of time it takes for a customer to receive a good or service once it’s been ordered.
- Demands are not fixed, it’s volatile; You need to calculate demands based on trends.
- If you have too much inventory on hand, you’ll be able to meet customer demand.
- If you don’t have what shoppers are looking for, then they’ll look for the same (or similar) products from competitors, and you may lose these customers for good.
- But there are a few things that can throw off your sales predictions, your supplier’s lead time, and your business’s reordering needs.
Leverage Software Tools
Find out which inventory management software solutions are best for forecasting demand. To contextualize this, let’s think about our athletic supply store again. Let’s say the highest number of baseball bats sold by your store is 4. And let’s also say that the longest your store has waited for a new order of bats to arrive is 60 days. You’ve already calculated that your average lead time demand is 140, so you’d need to keep a safety stock of 240 bats on hand—just in case the worst should happen and your reorder shipment is delayed. Regular monitoring of your inventory performance is crucial for maintaining an efficient reorder point.
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There may be certain commonalities and similar variables (such as ordering different products from the same distributors), but for the most, reorder points differ from product to product. This variability means it’s important to calculate specific reorder points for each SKU or necessary raw materials. Alright, so now that we know our Lead Time Demand value for these skateboard wheels is 210, which one of these would not be a factor in determining the reorder point? we write that down somewhere and set it off to the side. There’s only one ingredient left in our reorder point formula — the Safety Stock value. Keep this in mind, and you’ll turn inventory management from a challenge into a strategic advantage. As mentioned previously, the key to forecasting is frequent analysis of sales data, especially with the occurrence of any major business changes.
How the reorder point formula can reduce stockouts in your inventory
- The benefits to improved inventory management processes are lower costs and improved cash flows.
- And once the sales die down, you may find yourself with capital tied up in excess or deadstock (not to mention all the cash spent on rush delivery).
- That way, you’re less likely to end up with too much or too little stock.
- InFlow has a Recommended Reorder Point report that examines your sales data and recommends reorder points for your products.
And the rest one is the lead time, which is the amount of time it takes to receive new inventory from the time an order is placed. Safety stock is a buffer of inventory that you keep on hand in case of unexpected spikes in demand or delays in receiving new inventory. Inventory is a crucial part of any business and the reorder point is an important part of managing that inventory.
- You may prevent stockouts and maintain the smooth operation of your company by being aware of and leveraging your reorder point.
- The second is the sales rate, which is the average amount of an item that is sold over a specified period of time.
- Utilize inventory management software to track these metrics in real-time, allowing for prompt adjustments to your reorder point.
- Stocking too much not only occupies valuable warehouse space but also escalates carrying costs, covering utilities, security, and insurance.
- To calculate reorder point, you’ll need to use the reorder point formula.
- All of these practices leads to optimal product storage, helping minimize holding and handling costs.
- As a result, you make a highly conservative — and uninformed — estimate about when you should reorder product, leaving your shelves cluttered with slow-motion SKUs.
The reorder point is like a signal telling you it’s time to order more. It keeps your business running smoothly with just the right amount of stuff in stock. Well, having a clear reorder point makes managing your inventory way easier. It guarantees you’ll always have enough stuff in stock to keep customers happy while you wait for more to come in. Messing up your reorder points can mean missed sales, higher costs, and even a hit to your brand rep. If you’ve ever dealt with the hassle of running out of stock or the headache of having too much, you understand the importance of nailing inventory management.
SkuVault Core allows for the simple viewing, exporting, or printing of easy-to-read reorder point reports. From there, you can easily evaluate which products need reordering and make your purchase orders accordingly. Furthermore, SkuVault Core can even automate the purchase and reorder process.
Now that you know the terms, let’s walk through how to figure out a reorder point using an example, step by step. This formula considers both your usual usage and how long it usually takes for orders to arrive. By looking at both the highest and average scenarios, you’re better prepared for surprises. You might figure remembering when to reorder is easy peasy, something you can just wing. But handling inventory is like juggling, and having your reorder point (ROP) is like having an extra pair of hands to keep all those balls up in the air. It stops you from getting to the point where you have to tell customers, “Sorry, we’re out,” which isn’t fun because it means you lose sales and make customers sad.
