According to Wikipedia, a reorder point defines when to order, not how much to order. In other words, the reorder point informs you about the lowest stock level that your inventory should reach before you place a new order.
The appropriate reorder point is defined by the delivery time stock, which is the inventory that you need during the lead time, and the safety stock, which is the minimum inventory level acting as a protection against inventory shortages.
For more information regarding the reorder point and safety stock, see Reorder Point vs. Safety Stock: What’s the Difference? Meanwhile, in this post we’ll focus on the reorder point formula and how to calculate it.
So, here’s the reorder point calculation formula:
(Average Daily Unit Issues x Delivery Lead Time) + Safety Stock
Let’s take a closer look at each of these variables.
Average Daily Unit Issues
Average daily unit issues refer to the quantity of an item sold per day. You can define this variable by dividing the number of items sold during a month by the number of days in this month. For example, if you sold 650 T-shirts in January, your average daily unit issues would be 650/30 = 21.6 T-shirts a day. Please note that it’s not necessary to round to an even number.
Delivery Lead Time
Lead time is the amount of time in days that it takes from the time you order the stock until the time it arrives. You can derive this amount from your past replenishment orders, and it can be an approximate number. For example, it can be 7 days.
Safety stock is a minimum amount of stock that you want to keep in your inventory, and you should define it yourself, considering such factors as delivery delays, seasonal demand, or damaged items. You can research your past replenishment orders to find out these factors. For example, it can be 30 items.
As a result, the calculation can be as follows:
(21.6 x 7) + 30 = 151.2
It means that your reorder point equals 151.2.
Wirh Delivrd inventory management software, you can easily set up both the safety stock and reorder point for your orders, so that the system can warn you when you reach these amounts.
For more information, see Reorder Point vs. Safety Stock: What’s the Difference?
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