The re-order point can help you maintain optimal stock levels and ensure that the production or order fulfillment work smoothly. The re-order point is expressed as the lowest stock level at which you should purchase more stock, and is one of the key stats featured by a forecasting tool for small business. When the re-order point is correctly calculated, the replenishment stock arrives just as the last items in the current inventory are used or sold. Before looking at how the re-order point is calculated, it’s important to understand that due to different usage rates, every inventory item in your stock has its own unique re-order point.
Calculating the Re-order Point
The standard formula for calculating the re-order point is
(Average daily unit sales x Lead time in days) + Safety stock
This re-order point formula takes into account the rate at which inventory is selling and the time it takes for you to receive new inventory from your supplier. Also, it take into account the safety stock you should keep.
Breaking Down the Re-order Point Calculation
To calculate the Re-order point, you have to first calculate average daily unit sales, lead time in days, and safety stock.
To calculate the average daily unit sales, divide the total number of the units sold in a month by the number of days in that month, i.e. 752 pencils divided by 30 days in a month equals an average daily unit sale of 25.06 pencils.
To figure out the lead time in days, look at past purchase orders to see how long it took for the items to be delivered to you.
The safety stock is the minimum amount of stock you want to keep on hand. When deciding how much safety stock you need, take into account seasonality, delivery delays, transit damage, and supplier availability.
Re-order Point Made Easy
As you can see, calculating the re-order point isn’t necessarily difficult. However, calculating the re-order point manually for each item in an inventory that consists of hundreds, even thousands of items can take many, many hours. A online Re-order point calculator can help, as can a reorder point inventory management tool included in an online inventory system like DataQlick. DataQlick features in its Inventory Manager View and Control tabs a customizable Minimum Re-order Point, a Maximum Re-order Point, as well as a useful Re-order Days to Minimum Level stat, making it a lot easier for you to keep track of your Re-order points for every inventory item.