A reorder point, however, is a stock value at which new stock should be ordered in order to avoid the stock level falling below the safety stock value. The value of the sales or manufacturing rate also needs to be as accurate as possible to ensure the reorder point calculation is reliable. Capable manufacturing ERP software can simplify this process by way of automatic reports of sales and manufacturing data. When calculating ROP, lead time is mostly approximated using historical averages, in-depth analysis of the supply chain, supplier performance, etc. For fresh suppliers or in case of many unknowns, it might be a good idea to buffer this number higher by a small amount until the new supplier performance is determined.
Reorder point and safety stock: what’s the difference?
In this scenario, reorder level would be 6,000 units (2,500 of safety stock plus 3,500 units based on 7 days of lead time). First, Lead Time is the period between ordering and receiving goods, influenced by factors such as supplier processing, manufacturing, shipping, customs, and quality control. Accurately estimating lead time is crucial to avoid stock-outs or excess inventory. Safety stock is the level of emergency inventory that is kept to reduce the risk of stockouts caused by shifting supply, demand, or both.
Example of the Reorder Level Formula
Businesses with fixed ordering cycles or specific delivery schedules need to adjust reorder quantities to ensure sufficient stock between these predetermined points. For businesses operating outside standard hours, higher reorder levels may be necessary to account for times when orders cannot be placed or received. If you order when you still have a lot of stock on hand, it will lead to extra stock piling up, which will increase your holding costs.
Understanding Average Daily Unit Sales
Knowing the reorder point and how that trends can factor into the decision making process. Each SKU’s reorder point is part of the puzzle that helps managers determine which items are selling well, and which are underperforming. This gives them a better understanding of profitability and helps them make strategic business decisions. Production shouldn’t have to stop and start because you’re waiting on stock to arrive; that’s costly and inefficient. Every business has to maintain a certain level of raw materials or finished goods in its store. This is done in order to sustain the continuity of production in case of raw materials and the continuity of sales in case of finished goods.
Calculating Reorder point and Safety stock
By the time the inventory level reaches zero towards the end of the seventh day from placing the order materials will reach and there is no cause for concern. The Reorder Point Formula assumes that the order will be placed as soon as the calculation is made. Therefore, if you wait a few days to make your order with the supplier, the accuracy of the calculation will suffer.
You want to make sure you have enough inventory for the upcoming season so you use the reorder point formula. Storing more inventory than what can be sold in a timely fashion is not a productive use of capital. Reorder points provide businesses with greater financial flexibility by allowing them to keep a minimum amount of inventory on hand without running out of product. The robustness of your stock management hinges on the reliability of your least dependable supplier. Delays in shipment, inconsistent product quality, or even a vendor going out of business can throw a wrench in your inventory plans. These variables are often dynamic, requiring constant vigilance and adjustment.
For instance, if you sold 600 units in a 30-day period, you sell 20 units in a day on average during those 30 days. While it is technically possible to use Excel to manage your reorder points, it’s not good business practice and will quickly become a pain point. Growing product businesses should manage their stock using reliable inventory management software. This creates one source of truth for data and enables effortless data analysis and collaboration.
However, if the company places an order too late, it would result in stock-out costs, for example lost sales, etc. Continuous review systems monitor inventory constantly and place orders as soon as levels hit the reorder point, requiring sophisticated tracking systems but offering up-to-date control. In contrast, periodic review systems check inventory at fixed intervals (e.g., weekly, monthly) and how to void a check order if levels are at or below the reorder point. This more nuanced approach results in a lower reorder point than our simpler calculation, potentially leading to lower inventory costs while still maintaining a high service level. The purpose of a reorder point is to find and set the lowest stock level for an inventory item at which a new order should be put in, in order to avoid a stockout.
Understanding reorder levels includes grasping several key components that work together to determine the optimal point for placing new orders. Moreover, they enhance forecasting and planning by providing insights into demand patterns, seasonality, and trends through close monitoring of reorder frequency and quantity. The data retrieved supports better purchasing decisions and production planning.
- If you sell 5 chairs each day, for example, your daily sales velocity is 5.
- Below is a table that identifies some of the most common pitfalls and provides strategies to avoid them.
- Effective management of reorder levels involves several advanced strategies.
- For large corporations, mastering reorder level calculations is instrumental in maintaining adequate resource levels conducive to operational standards.
Calculating basic safety stock is quite a straightforward affair that involves multiplying the average demand for items with a preset value of safety days. Many advanced formulas exist, however, that enable arriving at more accurate and efficient safety stock levels. Ongoing analysis helps in keeping the stock levels optimized and prevents stock-outs or overstocking. After implementing your calculated reorder level, assess and adjust as needed based on actual performance, changes in demand patterns, or shifts in lead times. This ongoing evaluation ensures that your reorder levels remain effective and aligned with your business needs. The sales or manufacturing rate, or demand rate, also differs per item and is a function of consumption over time.
Both demand and lead time must be in the same unit of time i.e. both should in in days or weeks, etc. Next, determine the Lead Time, which is the period it typically takes from placing an order to receiving the goods, including processing, shipping, and other relevant factors. For instance, if it takes two weeks to receive an order, the Lead Time is 14 days. For a company, the maximum consumption is 15,000 units per week, while the maximum delivery time is 10 weeks. In Unleashed you can use stock alerts on the dashboard to see at a glance which items are reaching their reorder point. Let’s look at how to calculate a reorder point both with and without safety stock.