Maintaining proper inventory levels is an elegant dance that must balance consumer demand and supplier reliability. Storing too much inventory eats up your budget in terms of warehousing costs and available capital, but you also need enough inventory to account for unexpected demand or supply problems.
How do you strike the middle ground? By calculating reorder points for each product.
What is a reorder point (ROP)?
A reorder point (ROP) is the minimum unit quantity that a business should have in available inventory before they need to reorder more product. The formula to calculate reorder point is the sum of lead time demand and safety stock in days.
Why is the reorder point important?
Reorder points ensure that you don’t fall behind on your next batch of inventory. With an accurate reorder point for each SKU, you’ll always have enough stock on hand to satisfy customer demand — without tying up excess capital in inventory.
Storing more inventory than what can be sold in a timely fashion is not a productive use of capital. Reorder points provide businesses with greater financial flexibility by allowing them to keep minimum amount of inventory on hand without running out of products.
Too much inventory is expensive, but too little inventory can result in stockouts, which are harmful for your business: Orders are delayed or cancelled, your business loses customers, and your reputation can suffer. Reorder points help prevent stockouts in the first place.
Calculating reorder points goes hand in hand with having a clear idea of purchasing trends over a given period of time. The more you calculate ROP for each product, the more accurately you can forecast demand in the future.
Reorder point formula
Ecommerce businesses can use a simple formula to calculate reorder points for each product:
ROP = Demand during lead time + safety stock
How to calculate the reorder point
So now you know the formula, but what is demand during lead time? How about safety stock? In this section we break down ROP and tell you exactly how to calculate it.
Demand during lead time
Lead time is the number of days between when you place an order with your manufacturer or supplier for a product and when you receive the product. Your lead time will be longer if your supplier is overseas as compared to a domestic or in-house production facility.
To find demand during lead time, just multiply the lead time (in days) for a product by the average number of daily units sold:
Lead time demand = lead time x average daily sales
It’s not enough to know the average demand for a product, as that demand can increase suddenly or problems with a supplier can prevent you from restocking as quickly as you expected. Safety stock, as the name suggests, is the extra “just in case” inventory you keep on hand to anticipate variability in demand or supply.
Safety stock level = (Max daily orders x max lead time) – (average daily orders x average lead time).
To find the proper safety stock level for a given product:
- Multiply the maximum number of daily orders by the maximum lead time that may be required in case of supplier delays.
- Multiply the average number of daily orders by the average lead time.
- Subtract the result of Step 2 from the result of Step 1.
Now, back to our reorder point formula: Just add together the lead time demand and safety stock level, and, voila — you’ve calculated ROP.
ShipBob keeps reorder points simple
Calculating ROP for each product can be time-consuming and challenging, especially if your inventory is patched together from several suppliers or you sell lots of products. ShipBob’s cutting-edge inventory management software and analytics tools make it easier than ever.
ShipBob is an order fulfillment solution that features built-in inventory management software, giving you precise control over your inventory. You can check inventory counts at each fulfillment center and set automatic reorder points, so you are notified when stock is running low.
When you outsource fulfillment to ShipBob, all of your data is centralized in one place: your dashboard. Our software tracks purchasing trends over time to help you with inventory forecasting based on seasonal trends and more.
ShipBob’s platform doesn’t just help with inventory control and forecasting, but generates powerful analytical reports covering all areas of your business. You can get inside the numbers and find new ways to make your business more efficient.
Establishing reorder points frees up crucial capital and ensures your business is operating at maximum efficiency. The most important and sometimes hardest part of calculating reorder points accurately is that you need reliable data throughout your supply chain and accurate picture of customer demand. If the data is off, then the calculation will be inaccurate and you may end up with too much or too little stock.
ShipBob helps ecommerce brands manage inventory, forecast demand, pack orders, reduce shipping costs, and deliver on customer expectations. With a network of fulfillment centers around the United States and technology that’s integrated with the leading ecommerce platforms, ShipBob helps brands improve their shipping strategy. Get pricing today and learn more about why thousands of brands work with ShipBob’s ecommerce fulfillment services.