What is Reorder Point Formula, and How Is It Calculated?
Maintaining an accurate inventory level at all times is a difficult task, but it requires a careful balance between consumer demand and supply. If you store too much inventory, your warehouse and cost will go up, and if you do not have enough stock, you will face unfortunate stockouts.
How do you maintain the balance of the required supply of inventory? You do it by automatically calculating the reorder point for each SKU.
Let’s look at what reorder point is and how it is calculated for accurate inventory management.
What is Reorder Point?
Reorder point is the inventory or stock level of a specific product after which the SKU needs to be re-ordered. It is the threshold point beyond which arrangements should be made to procure fresh stock. It considers the time it will take to replenish inventory so that the inventory levels don’t reach nil.
Significance of Reorder Point
Calculating the reorder point for your business will help you reduce inventory handling and ordering costs as you will procure inventory in time. Provide you with greater financial flexibility by keeping a minimum amount of stock on hand without running out of products.
The next advantage of reorder points is that you get to avoid stockout situations. If you do not order an inventory on time, you can have a problem where you do not have any more inventory in stock. This can lead to acceptance of back orders or out-of-stock notifications to customers, which can cause a bad name for your brand.
The reorder point is automatically calculated in inventory management systems. This helps you with improved supply forecasting, and you can manage your overall supply chain operations efficiently with this data.
Reorder Point Formula
The reorder point formula is as follows –
Reorder Point (ROP) = Demand during lead time + safety stock
Demand During Lead Time
Demand during lead times stands for the number of days when you place a purchase order with your supplier and when you receive the product.
To calculate the demand during lead time, multiply the lead time in days for a product with the average number of units sold daily.
Lead time demand = lead time x average daily sales
Safety stock refers to the extra inventory you have on hand to handle the variation and demand or supply. It is essential to calculate the safety stock for calculating the reorder point, as restocking inventory can be delayed due to different reasons. The safety stock level is calculated with the below formula –
Safety stock level = (Max daily orders x max lead time) – (average daily demands x average lead time)
Multiply the maximum number of daily orders with full lead time, multiply the average daily orders and average lead time, and subtract the two.
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Shiprocket Fulfillment has over eight fulfillment centers located across prime locations in India. All of these confinement centers are equipped with the latest inventory management software to help you calculate the reorder points on time so you can restock your inventory well in time.
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The reorder point formula is an essential metric for restocking or inventory and staying in a comfortable situation by avoiding stockouts and reducing losses. Make sure you carefully revisit this metric and restock your inventory well in advance.