What is the reorder point formula? Definition, calculations, and benefits

No matter what your category, if you have products you can’t sell, you either have to keep paying to store them, or you need to dispose of them, which also comes with a cost. “When you end up having a lot of inventory that you cannot sell to your customers, that’s costly because inventory is what you have paid for and your customers have not paid for yet. And if you have excessive inventory, you will have to do a couple of things.

• Then, when orders fly in, we’ll pick, pack, and ship them to where they need to be, quickly, reliably, and cost-effectively.
• Calculating reorder points may not seem like fun, but they can help you get the most value out of your inventory.
• It also helps avoid the profit loss from placing orders too early, which can cause the stock to pile up.
• The reorder point logic can avoid poor customer experience and deliver the products once your customer purchases the product from your website.
• Let Upper help you manage inventory levels with its route planning and optimization features.
• Calculating your reorder point will help you maintain consistent sales and avoid unnecessary expenses from reordering additional inventory before you need it.

If we total those numbers, we get 180 total units sold over the past 90 days. It’s based on your purchase and sales cycles, and it varies by product. However, once you have a handle on the patterns of a product, you’re ready to start putting the variables together. The ideal reorder point is one where the ordered inventory will arrive before you dip below a comfortable level, but not so early that storing and tracking it becomes a problem. Inventory that arrives too early is especially problematic with perishable inventory, such as meats and produce.

How Do You Calculate Reorder Point?

One advantage of installing a platform like NetSuite’s to monitor your ROP thresholds is that it also integrates with the rest of your inventory management activities and data. Having everything in one place reduces the need for humans to move data and run analyses, and, in doing https://www.bookstime.com/articles/how-to-calculate-reorder-points so, it also reduces the potential for errors to creep into the data. The optimal reorder point will maximize the profit you can make from your stock and avoid surplus inventory in your warehouse. This is the point at which you need to order products to replenish your stock.

For instance, if the backlog or lost-sale cost is much higher than the holding cost, the retailer should set a higher reorder point to avoid stockout, and vice versa. It’s very important to use a model that fits the business scenario of the retailer,” Miao says. This method simply calculates the average amount of inventory that is used over a period of time and orders that quantity when inventory levels reach a certain point. In a fixed reorder point, you can set a specific threshold for each item in your inventory and automatically generate a purchase order when that threshold is reached. This can take the guesswork out of reordering and help you keep your shelves stocked with the products your customers need. Therefore, a good reorder point also needs to consider the number of ordered items left in your warehouse by the time the materials arrive.

How the reorder point formula can reduce stockouts in your inventory

If you would like to learn more about how Numerical Insights LLC, please visit  or contact Tracey Smith through LinkedIn. To read future posts, you can join Ms. Smith’s network by signing up here. The answer is 100 units need to be replenished by the Star Mobile shop from his supplier every 4 days. Reorder point hence becomes an indicator for the storekeeper to restock the items that are finishing up in the store.

Calculating reorder points may not seem like fun, but they can help you get the most value out of your inventory. It’s a vital part of calculating your optimal economic order quantity. Use the information we’ve shared here to control your inventory and make informed decisions that increase your bottom line. One issue that you may discover when performing an inventory audit is that you have overstock in your inventory. This inventory should not be reordered and you should offload it to make more room for profitable goods. This value says that when our inventory level reaches 350, it’s time to place another order for this item with our supplier.

Reorder Point Strategies

You can get inside the numbers and find new ways to improve supply chain efficiency. A reorder point is a fairly straightforward concept, but successful implementation requires paying attention to nuance and details about the business, suppliers and customers. Here are a few strategies that will help you turn theory into practice. If missing the reordering point happens frequently, you might need inventory management software to keep track of reorder points.

But this comes at a risk – if any of your formulas are wrong, so will your reorder point calculations. If yours is a small startup, calculating product reorder points is as simple as setting up an Excel spreadsheet (or a spreadsheet with Google Sheets or Apple Numbers). You source the shirt from Supplier B, who has a typical lead time of 7 days. When establishing a reorder point, you want to avoid repeatedly pulling from your safety stock. Even if you eventually run through your safety stock, having that buffer can extend your sales beyond that of a competitor.

How to solve the reorder point formula – Inventory management strategy

Incorrectly managing your inventory comes at a steep price, and the likelihood of this happening increases as your portfolio grows. However, many retail companies don’t give their stock orders the attention needed to manage them correctly. Get pricing below and learn more about why thousands of brands work with ShipBob’s ecommerce fulfillment services. “So many 3PLs have either bad or no front-facing software, making it impossible to keep track of what’s leaving or entering the warehouse.

ROP stands for reorder point, which tells a business when to place an order (where the «when» is given in terms of current inventory levels). EOQ stands for economic order quantity, which determines how much to buy when placing those orders. Some businesses include other inputs, such as the standard deviations of sales velocity and lead time. Adding such fancy math is useful when using more complex models and assumptions, which are often best for situations where sales and lead times vary quite a bit. But the three variables above form the core of almost every ROP calculation.

Now that you have every variable required for calculating reorder points, you can use the ROP formula to get your desired results. Now, you’ve all the required variables to calculate an accurate ROP for a product. Lead time is when you place a purchase order with your supplier or manufacturer for a product and when you receive the product. Reorder point  (ROP) is not a static number as it relies on your sales cycles and purchases. However, once you analyze the pattern of a product, you’re ready to put the variable together.