"How much raw material should I order from my supplier?"
"When should I place my next supply order?"
Yes, we know that these are the top two questions you always have to ask yourself as a business owner. We also know that these questions aren’t easy to answer as well.
Hence, today with this article we have come to your rescue. In this article we will tell you about inventory reorder point technique that will help cut the struggle out of answering these crucial questions.
Inventory management or inventory control isn’t an easy one when you have too much on your plate to manage. Along with that, getting the optimal level of inventory right in your warehouse is nearly impossible. Once you know when exactly to order your inventory/raw materials and the quantity of the goods, consider your job done. And for that, you will need Inventory Reorder Point.
Worry not, you will learn all about it right here.
By the end of the article you will know:
- What is Inventory Reorder Point?
- What is the difference between reorder quantity and reorder point?
- 3 Reasons why it is important to calculate Inventory Reorder Point.
- How to calculate Inventory ROP?
Let’s delve right into it.
What is Inventory Reorder Point?
The inventory reorder point in inventory management is the minimum level of stock for a specific product. When you reach that stock level it triggers the reordering of that particular product.
While ascertaining the reorder level of the inventory for different SKUs, Inventory ROP determines the lead time it will take to restock so that you are not ordering goods in the nick of the time. Rather, setting an accurate reorder point allows you to offer the goods available while hanging tight for new stock.
However, what can be often confusing is if reorder quantity and reorder point are the same. If you get confused too, the upcoming section will free you from that confusion.
Difference Between Reorder Quantity and Reorder Point
Let us look at how reorder quantity and reorder point vary:
- Reorder level is the stock level of a specific product based on which order for new stocks is placed. On the other hand, reorder quantity is the number of units to be ordered while placing a new purchase order.
- Reorder level indicates when to submit a request for the new stock of goods and reorder quantity makes clear the number of goods to order.
- Reorder point involves factors like utilization of goods during the lead time, security level, and renewal period, and the factors involved in reorder quantity are carrying cost of stock per unit, cost of the order, and so on.
- Reorder level is the priority. You first evaluate whether the stock level of a product is above the reorder level or below the reorder level. At the same time, reorder quantity is determined to be put in on the new purchase order, solely after it has been concluded that new stock has to be bought.
- The main risk factor in reorder level is being out of stock; whereas the main risk factor in reorders quantity is the high cost per unit of the inventory ordered.
Hope the difference between reorder quantity and reorder point is now clear.
Now let us understand why it is essential to calculate the reorder point of your inventory.
3 Reasons Why it is Important to Calculate Inventory Reorder Point
Reorder point makes sure that you don't fall behind on your next stock. With a precise reorder point for each product, you'll always have sufficient stock available to fulfill your customer's demand. Here are a few more reasons why it is important to calculate inventory reorder point:
Reduction in Inventory Cost
Storing goods, raw materials more than necessary, and customer demand is not a useful utilization of capital. Reorder points provide businesses with greater financial understanding and allows you to keep the minimum inventory based on the customer’s demand.
A lot of inventory is costly, however too little can result in running out of stocks, which is harmful to your growing business. The customer orders are postponed or dropped, and you start losing your loyal customers. With reorder points you will be able to maintain an optimum level of inventory. You will know exactly when to order new goods, raw materials.
Calculation of the reorder points goes inseparably with knowledge of the running trends in a given period. The more regularly you study the ROP for any product, the more precisely you will be able to estimate the demand for a product in the future. It will also give reassurance that you have utilized the available resources efficiently.
Now that you have understood the importance of calculating the ROP of your inventory, let us understand how to calculate it.
How to Calculate Inventory Reorder Point?
You can calculate the ROP of your inventory with the help of a simple formula.
The formula for Inventory Reorder Point:
Reorder Point (ROP) = Demand during lead time + safety stock
For example, if the demand during lead time for ear pods is 104 and safety stock is 120 then the reorder point for the ear pods would be?
Reorder Point= Demand during lead time + Safety stock
Reorder Point= 104 + 120
Reorder Point= 224 units
We already know what ROP is but have no clue what demand during lead time or safety stock is. So, let us quickly learn about it before we start doing any calculations.
Demand during the Lead time
The lead time in ROP is the number of days between when you put in a purchase order to your supplier for a product and when you receive that product. Your lead time will be longer if your supplier does not come from the same country as you.
You can calculate the demand during the lead time with the following formula:
The formula for Calculating Demand During the Lead Time:
Is it enough for you to know the demand for your product? The demand for your product is rarely static. It is either going up or down and this happens more frequently than you can imagine. This in return prevents you from restocking goods. Another roadblock could be unforeseen problems with the supplier to be able to deliver the goods on time, not as quickly as you expected.
With Safety Stock you can always have the “just in case” inventory ready. Whenever you are facing a failure of delivery of goods, you can use your safety stock to deliver to customer demands.
To calculate the safety stock you must have with you, you can use the following formula.
Formula for calculating your safety stock:
Once you have calculated the safety stock and demand during the lead time, you simply have to put these values in the ROP formula and your ROP is ready.
For example, If your demand during lead time is 112 and safety stock is 122 then your ROP would be
ROP = Demand during lead time + Safety stock
ROP= 112 + 122
Therefore, whenever you are left with 234 units of a product you will place an order for more units of the product.
Over to You
Calculating reorder points frees up your capital and guarantees your business is working at its maximum capacity. To calculate the ROP of your inventory, all you require is accurate information you can rely on for planning and managing your supply chain. Since ROP also helps you determine your customer's demand, you cannot afford to have faulty information. If you end up with faulty information and base your ROP on that, there is an off chance that you will either overstock or have nothing to at all.
It is easy to manage inventory using softwares such as Deskera. With Deskera Books you can update all the information related to your products in real-time and make sure you are not missing out on anything. Not just that, but Deskera also allows you to maintain your balance sheets in the system and manage your inventory efficiently.
If you don’t believe it, try it yourself for 15 days, we guarantee that it will make your life easy.
We hope this article helped you learn that:
- Inventory Reorder Point in inventory management is the minimum level of stock for a specific product.
- Reorder level is the stock level of a specific product and reorder quantity is the number of units to be ordered while placing a new purchase order
- Calculating inventory reorder points helps with the reduction in inventory Cost, reduces stockouts, and improves forecasting.
- How to calculate reorder point by calculating demand lead time and safety stock.
To learn more about inventory management, you must read the following articles: