Reorder Point Status: Definition and ImportanceTime to read: 6 minutes
With the rapid growth of online retail, there is a constant need to increase stock levels. To do this, companies need to keep track of their inventory levels and maintain reliable sources of supply. Many retailers rely on replenishment plans using reorder point status to achieve this.
Maintaining optimal inventory levels between customer demand and supplier dependability is crucial. It would be best to have adequate inventory to cover unforeseen demand or supply issues. However, keeping too much stock depletes your budget for storage expenses and available cash.
Managing stock and future order quantities may be challenging, with maintaining cash limits for your reorders and calculating inventory for seasonal goods.
Integrating reorder points and safety stock into your replenishment calculations is essential. Doing this will enable you to effectively manage both the number of your upcoming orders as well as your present inventory.
The reorder point tells you when to buy more inventory to avoid running out of stock.It typically results in the acquisition of a defined quantity of replenishment stock. The replacement inventory should arrive at the reorder point right when the remaining on-hand inventory gets used up. And it hinges on the purchase procedure and supplier fulfillment going as expected. Consequently, there are no delays in the manufacturing and fulfillment processes, and the overall inventory on hand gets reduced.
Since each inventory item has different consumption rates and variable lead times from suppliers, the reorder point might vary for each product. For example, your company purchases the same part from two suppliers: one requires one day to deliver an order, and the other requires three days. Following this schedule, your reorder point for the first supplier would be when one day’s supply is left on hand and three days’ supply for the second supplier.
Calculating Your Reorder Point Status
Reorder points don’t have fixed values. It varies depending on the products sold and on your sales and purchasing cycles.
The most critical metrics are lead time and daily sales velocity.
Every product you sell has a different daily sales velocity or the average number of daily units. Each product has a different sales velocity. You need to ask yourself,“how many of these items am I selling each day?”
You just need to add up your sales over a certain period to get this value. Let’s use the chart below as an example:
Get the total sales quantity across three months and divide by 92. This is the total number of days from March to April. Our calculation will become (500+650+400) ÷ 92 = 16.8. On average, your business can sell around 17 items per day in those three months.
Lead time is essentially the amount of time it takes for an ordered shipment to arrive from a supplier. Depending on your purchase quantity, delivery times may change as larger orders could take longer to ship. The lead time is also impacted by when you place the purchase. Compare orders during a busy season versus a slow season.
eCommerce companies can follow this simple formula to determine their reorder point status:
Reorder Point (ROP) = Daily Sales Velocity x Lead Time
You can quickly determine the reorder point status by multiplying your daily average sales by your lead time. Let’s assume that your business manages to sell 300 items, on average, in a day. Your lead time to fulfill these products to your customers is three (3) days. Using our formula, 300 x 3 = 900, you should restock once you have 900 items in your inventory left.
This basic formula helps you find a rough estimate of when you should send in a request for resupply. Many retailers will find it useful to factor safety stock into their calculations.
Safety stock is comparable to a reorder point. But it’s a surplus amount to ensure that you won’t run out of stock entirely in the event of delays.
As this stock is considered separate from your standard inventory, you can add this number to your original ROP value. Using our previous example of 900 ROP, let’s assume you’ve calculated a safety stock of 450 items.
To give you your updated reorder point status, you need to add this value to your ROP, 900+450 = 1,350.
You can source your goods from various vendors, each of whom has a unique lead time. Therefore, it is essential to consider your reorder point at each item level.
Let’s define this with a hypothetical business model. Pretend you own a store where you sell pencils and notebooks to students. These two goods you get from several vendors, each with a unique lead time. The lead times for the delivery of the pencils and notebooks are one day and four days, respectively. You sell 10 (ten) pencils and five notebooks regularly.
Your ROP with the supplier that supplies the pencils should be the following without safety stock: ROP = 10 x 1 = 10 pencils.
When just ten (10) pencils remain, you have one day of sales left until you run out of supplies. The new collection should arrive exactly in time for you to continue selling uninterrupted, as your lead time is also one day.
Similarly, your ROP with the supplier that sends the notebooks needs to be: ROP equals 5 x 4 = 20 notebooks.
When you have 20 notebooks, or four days’ worth of merchandise, remaining in your inventory, you should place another order.
3 Key Benefits of Reorder Point Status
Computing for your reorder points ensures you don’t run out of inventory before your next shipment is due. You’re better prepared to meet consumer demand if you have an exact reorder point for each SKU. It will also save you from tying up extra cash in inventory.
A company reduces the danger of stockouts by using the reorder point to buy new stock on a timely schedule. It helps avoid lost sales which greatly impact your bottom line. A reorder point may help streamline your purchasing department’s efforts when utilized appropriately. It allows the materials management system to send suppliers replenishment purchase orders automatically.
1. Reduced Inventory Costs
Stocking up on goods beyond what you can sell quickly is wasteful. Reorder points lets you retain less inventory on hand without running out of stock, providing additional financial flexibility. A better understanding of your finances allows you to maintain a much leaner inventory based on your customer’s demands.
2. Avoid Stockouts
Too much inventory costs money, but not having enough can lead to stockouts. Both are bad for the company since they cause delayed or canceled orders, clientele to leave, and reputational damage. Reorder points will enable you to keep your inventory at the right level. You’ll be able to place orders for new products and raw materials on time.
3. Detailed Forecasted
Understanding the running trends over a specific period is necessary for correctly calculating your reorder points. You can more accurately predict a product’s future demand if you do more research on a product’s ROP. Additionally, it will provide confidence in knowing you can effectively use the resources at your disposal.
Maintaining a Healthy Inventory with Reorder Point Status
Calculating reorder points ensures that your company is operating at its full potential and frees up money. To help manage a smoothly flowing supply chain, you need the correct information to determine the ROP of your inventory. You cannot afford inaccurate information because ROP also aids in determining your customers’ demand. There is a risk that you may either overstock or have nothing to sell if you base your ROP on inaccurate information.
Planning when to place new orders is an essential component of inventory control. You may save on excess expenditure by setting your reorder points to an ideal amount. It also guarantees you’ll have adequate inventory for your clients even if things take an unexpected turn.
Learning when to reorder when handling a more extensive inventory can be challenging. When you start, keeping track of how much you’ve sold each day is simple. However, manually tracking each transaction becomes taxing if your sales volume increases across various channels. Missing the reordering point becomes more likely if you merely total your figures weekly.
Setting ordering points and then moving on to the following crucial project may seem appealing, but circumstances constantly change. Demand rises and falls, almost always unpredictably.
Your suppliers may have pressure points that may alter at any time. Market circumstances might change abruptly or gradually in unanticipated ways.
Regardless, based on your company’s needs, periodically examine your reorder point policies. Every three months is a great place to start.
Since the reorder point formula is a dynamic model with changing factors, your reorder point per item will also alter over time.
Therefore, sticking with one strategy with reordering points is not necessary. It will probably vary as your company expands, depending on whether you are nearing peak or off-peak seasons.
Calculating and managing the reorder point status for each product can be time-consuming and difficult, especially if you control and monitor stock through spreadsheets. Utilize ZhenHub to arrange reorders and manage inventories efficiently. Our all-in-one logistics dashboard can give you an overview of which of your products are nearing their reorder point. Take a step towards efficient eCommerce logistics management when you sign up at our website now!