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)?
The reorder point (ROP) is the minimum inventory or stock level for a specific product that triggers the reordering of more inventory when reached. When calculating the reorder points for different SKUs, the lead time it will take to replenish inventory is factored in to ensure inventory levels don’t reach zero. Setting accurate reorder points allows businesses to avoid having products out of stock while waiting for new inventory.
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 time period. The more you calculate ROP for each product, the more accurately you can forecast demand in the future and ensure you use the reorder quantity formula correctly.
Reorder point formula
Ecommerce businesses can use a simple formula to calculate reorder points for each product. This is the reorder point formula:
Reorder Point (ROP) = Demand during lead time + safety stock
How to calculate reorder points
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 a purchase 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 units sold daily:
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 calculation, 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 levels, so you are notified when stock is running low.
“Off the bat, I liked that I would be able to control multiple warehouses through one page with ShipBob. With my old 3PL, I could never just open a page and get the info I wanted. I had to click several times, then export it, and try to make sense of it. ShipBob lets you manage your inventory while providing important data in a very digestible way.”
Wes Brown, Head of Operations at Black Claw LLC
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 analytics tool is also really cool. It helps us a lot with planning inventory reorders, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.”
Oded Harth, CEO & Co-Founder of MDacne
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 improve supply chain efficiency.
Establishing reorder points frees up crucial capital and ensures your business is operating at maximum efficiency across inbound and outbound logistics. 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.
“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.
On the supply chain side, I just throw in what we placed at the factory into a WRO in the ShipBob dashboard, and I can see how many units we have on-hand, what’s incoming, what’s at docks, and so on. I can see all of those numbers in a few seconds, and it makes life so much easier.”
Harley Abrams, Operations Manager of SuperSpeed Golf, LLC
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 below and learn more about why thousands of brands work with ShipBob’s ecommerce fulfillment services.