Reorder Point Defined: Formula & How to Use

Some inventory management tools also enable businesses to generate customized reports on inventory stock by item, vendor, delivery date, assembly, and more. Rich inventory insights like these empower businesses to fine-tune their reorder points and overall inventory https://www.bookstime.com/ management processes. The reorder point calculation takes into account delivery lead time from suppliers. By keeping track of average delivery lead time, you can identify your most reliable and least reliable suppliers and make more informed procurement decisions.

If you have to enter a static reorder point into your order fulfillment software, be sure to schedule time once a month or once a quarter to recalculate your reorder points. Some warehouses have software that automatically pulls real-time data to adjust inventory reorder points based on this underlying info. In this case, we’re going to assume that our SLA is 15 days instead of 5. We would use this number, in addition to our historical data, to find our standard deviation. For most companies, service levels float somewhere between 90 and 100 percent. For instance, if your service level is 92 percent, you’re saying you want to fulfill orders for this product at least 92 percent of the time.

How Are Reorder Points Used?

Reorder points help to ensure products and cash flow in the right direction, at the right time. With accurate reorder points for all of your product SKUs, you can meet customer demand in a timely fashion to improve cash flow and avoid the bloated costs of overstock. Poor restocking processes can have a detrimental effect on your inventory plans. When inventory shipments don’t arrive on time because you ordered too late and you don’t have a safety stock that acts as a cushion in cases like this, it increases your risk of stocking out.

A well-calculated reorder point ensures new inventory arrives just in time to avoid a shortage and maximize fill rate. Like everything else, they are subject to change, which means your reorder points are too. So, although having an effective reorder point policy means you have freed up more time in your week, you still need to stay on top of things by making new reorder point https://www.bookstime.com/articles/reorder-point calculations. For example, Katana lets you set reorder points and highlights when you need to order more materials to keep ideal inventory levels. For example, if there’s a supply chain interruption, you may need to rework your formula, give more lead time, and order more often. If sales are unusually slow or impacted by seasonality, you may need to hold off on reordering.

What is Reorder Point and Reorder Point Formula?

This way, you’re less likely to order too much or too little stock in your future orders. In this section, I will break down the reorder point formula and tell you how to calculate it correctly. In the scenario on the screen, this company starts with 10 weeks of inventory and as the weeks go by, the inventory is slowly depleted. If demand for this inventory is constant, then we would run out of inventory in exactly 10 weeks. Demand is never constant in the real world, but I’ll show you how to deal with that in just one second.

This means that when we reach the point of having 14 weeks of inventory in-house, we place an order with the supplier. Our example company likes to order 13 weeks of inventory at a time because of certain production considerations. If the supplier delivers on-time, i.e. in 10 weeks, that means the new inventory should arrive just as we are reaching an inventory level of 4 weeks worth of stock. Tracking sales, demand, and inventory to optimize ROPs can be a time-consuming and stressful task.

How to Calculate Reorder Point

To read future posts, you can join Ms. Smith’s network by signing up here. Overstock ties up capital and runs the risk of wasting inventory—especially if the product has a short shelf life. Reorder point levels may increase as your business grows, and they may fluctuate depending on whether you are approaching high or low season. If you want to dive deeper into the topic, you can read more about calculating your safety stock here.

But there’s not a direct relationship in the formula to customer service and customer satisfaction. Reorder points help you know when to order more stock, so you never hit your safety stock level. Whereas, safety stock exists as a last option you would only use in an emergency.