- The inventory level at which a new order should be made to prevent stockouts is known as the reorder point.
- Lead time, demand variability, and safety stock are some of the considerations that must be taken into account when determining the reorder point.
- There are two typical methods for controlling inventory levels and determining reorder points: continuous review systems and periodic review systems.
- Good inventory management, which includes determining the right reorder points, can lower costs, boost customer happiness, and boost productivity.
About 46% of small-scale business owners either don’t track inventory or use a manual method for inventory management.
With the rising customer demands, these ineffective methods can result in business losses and minimize your chances of business success.
However, you can overturn the situation through effective inventory management and result-oriented strategies for better results.
Analyzing your reorder point in your inventory management process can help you align with the sales trends and maintain the inventory needed for desired customer experience.
Let’s understand the concept of reorder point and how to implement it in your business operations.
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What is Reorder Point (ROP)?
Reorder point is the stock level in your inventory that triggers you to reorder the products. It’s the minimal stock amount for an item before you require replenishing to fulfill the customer demand.
When your inventory levels reach that reorder point, you must automate purchasing order generation and processing or ask your managers to handle the process manually.
For instance, if you operate an online clothing store and your reorder point for a white t-shirt for men was 10, you need to reorder the t-shirts when there were 10 left in stock.
The reorder point logic can avoid poor customer experience and deliver the products once your customer purchases the product from your website.
Delay in the deliveries and not matching the ETA because of limited stock can impact your relationship with the customers and increase the chances of losing future business transactions.
Apart from quality customer experience, here’s why reorder points are important.
Why Is the Reorder Point so Important?
Reorder points can assist you in transforming and handling inventory throughout your supply chain. Having the required stock in your inventory is essential to keep customers satisfied and minimize losses. We have compiled the essential benefits of reorder points.
1. Prevents out-of-stock situations
With the rising competition in the retail industry, keeping your product stock up-to-date is important to avoid stock-out situations and losing the opportunity to increase your revenue and profits.
You can track the reorder point and ensure your customers don’t face a poor customer experience while purchasing a product from your retail website.
If you avoid reordering products at the right time, your customers can reduce the potential revenue. Keeping the safety stock can also avoid increasing demand during the peak season.
The importance of maintaining your stock reorder point increases during a peak season when the demand and website traffic is higher.
2. Ensures customer retention
About 35% of consumers will cancel their order if the delivery time is too long. Not ensuring a safe stock level and ineffective inventory management can cause delayed deliveries and not aligning with the promised ETAs.
If you’ve run out of stock during the transit and your customers have to wait for more than what you promised during the purchasing process, they’ll cancel and go elsewhere.
Also, if your products are consistently out of stock, you can lose customers’ business permanently. The top reason businesses lose customers is that they cannot meet customer expectations, and a business that lacks inventory doesn’t meet expectations.
3. Helps to earn desired profits
Once you calculate reorder point and equip the buffer stock, you can ensure on-time deliveries for your customers and a quality customer experience.
It can help you increase your business numbers, ensure client retention, and stand out. It also helps avoid the profit loss from placing orders too early, which can cause the stock to pile up.
Bulk products that sit in a warehouse longer than planned can cause expenses to add up. It can impact factors like operational cost, tax, insurance, and deterioration of inventory.
Warehousing bulk merchandise over long periods can cut into profit margins. Also, it worsens if your products have a short shelf life, like food. It goes bad or expires before your customers purchase it.
4. Better forecasting
Calculate your reorder points and have a clear idea of purchasing trends over a specific time. The more you calculate ROP for an individual product, the more accurately you can forecast product demand in the future.
But you must ensure you use the ROP calculations and formula accurately to avoid miscalculations and future troubles.
Reorder Point (ROP) calculations and its Formula
The ROP is the minimum stock level of a specific product before you need to add more inventory.
Reorder point (ROP) is not a static number as it relies on your sales cycles and purchases. It also varies on a per-product basis. However, once you analyze the pattern of a product, you’re ready to put the variable together.
Before looking at the formula, let’s review the factors involved in ROP calculations.
Basic variable of ROP
ROP involves different variables you must consider to achieve your desired recorder point number.
1. Average daily unit sales
It is the first variable to calculate reorder points. The average amount of a product you sell on a given data helps in accurate reorder point calculation.
For example, if you run an online clothing store and successfully deliver 65, 70, and 45 products in the first three months of the new financial year, respectively.
Then the total units sold are 180 in 90 days. Your average daily sales are 2 per day. Apart from the average time, you must calculate the lead time demand.
2. Demand during lead time
Lead time is when you place a purchase order with your supplier or manufacturer for a product and when you receive the product.
Your lead time will be higher if your supplier is overseas than in a domestic or in-house production facility. The delivery time of your shipment may vary based on the quality of your order.
You can calculate the lead time demand by multiplying the lead time (in days) for a product by the average number of units sold daily:
I.e., Lead time demand = lead time x average daily sales.
For example, let’s understand the lead time calculation using an example.
|Month||Order Amount||Delivery Time|
The total delivery time is 15 days for three delivery orders. So, the average lead time is 15/3 = 5 lead time on average.
So, the lead demand = 5 * 2 (as calculated above) = 10
3. Safety stock
The lead time demand can increase quickly, or you may face a problem with the supplier that restricts you from restocking inventory as quickly as you expected. So, calculating the average demand for the product is not enough.
Safety stock is the extra “just in case” inventory to ensure you prepare and anticipate variability in demand or supply.
Safety stock level is considered using the (Maximum daily orders x maximum lead time) – (average daily orders x average lead time).
You can find the proper safety stock level for a product by
- Multiplying the maximum daily orders by the maximum lead time required in the supplier delays scenario.
- Then multiplying the average daily orders by the average lead time.
- Subtract the result of step 2 from step 1.
For example, if you sell and deliver 10 t-shirts on average, but during weekends, you can sell as many as 15 t-shirts.
And if the average lead time is 5 days, but the maximum delay can take 10 days to get your shipment, then the safety stock level results are:
(15 x 10) – (10 x 5) = 100
You require about 100 units of safety stock in your inventory to guard against the unexpected.
Now, you’ve all the required variables to calculate an accurate ROP for a product.
Reorder point formula
Now that you have every variable required for calculating reorder points, you can use the ROP formula to get your desired results.
Reorder Point (ROP) = Demand during lead time + safety stock
If we use the results for the above examples in the formula, the ROP for your online clothing store will be 10 (Lead time demand) + 100 (Safety stock levels) = 110.
So once your stock hits 110 t-shirts, you will need to place a new order with your supplier. At 110 t-shirts, you’ll have enough to last as you can wait for new stock to arrive (10) while holding enough stock (100) as a buffer against an unexpected surge in customer demand or supply chain problems.
Now, let us discuss how to implement reorder points in your delivery business operations.
How to Implement Reorder Points Successfully?
A reorder point is a fairly simple concept, but successful implementation requires attention to nuance and in-depth details about the suppliers, business, and customers. Look at a few strategies to turn theory into practice.
1. Don’t overlook your reorder point
The vital strategy for successfully implementing a reorder is to execute it consistently. You can use a free reorder point calculator or manually use the reorder formula to replenish inventory and meet customer demand with finesse.
Reorder points provide businesses with details about how much stock is left and when you need to reorder. Once you keep the minimum inventory and the safety stock number, you don’t face stock issues with daily sales velocity.
2. Be wise about order quantities
If you are frequently hitting a reorder point, you might consider increasing the number of your orders.
Conversely, if your on-site inventory is becoming difficult or costly because of how much you have, and you’re not reordering very often, then you should decrease your quantity.
Analyze your reorder level and avoid the excess stock. Also, focus on maintaining a minimum level to ensure a sufficient supply for average daily usage.
3. Improve the ROP formula based on expected sales
Multiplying daily sales and lead time work if lead times and daily sales are constant throughout the weeks, months, or years.
But if the lead time is three days, and you know sales are on weekends, then you’d be better off using your expected sales over the next three days in your calculations.
Avoiding using your average daily sales because the perfectly fine inventory on a Monday may be insufficient on a Friday morning because of the busy weekend.
Once you manage your inventory using ROP and ensure the availability of products for your customers, you should streamline your delivery operations for complete customer satisfaction.
Integrate a professional route planner to remove the hassle of manual route planning and human errors that may cause delivery delays or failures.
When it comes to route planning, Upper is worth a try for your multiple delivery projects.
Let Upper Improve Your Delivery Efficiency
Upper Route Planner is an excellent delivery route planning and optimization software to assist you in taking forward your good work with inventory to the customer’s doorsteps.
The multiple-stop route planning software can help you bypass the dependency on manual route planning and ensure you transform the inefficiencies in your business workflows.
Once you maintain the inventory level and the customer orders a delivery, your delivery team can use Upper to ensure on-time, fuel-efficient deliveries for business success.
Within a few clicks, you can create optimized and shorted delivery routes. Try the 7-day free trial and witness the potential of the Upper Route Planner.
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Automize your delivery process with Upper and get efficient routes for your multi-stop deliveries. Let Upper help you manage inventory levels with its route planning and optimization features.
The formula for reorder points is simple. You must add demand during the lead time and safety stock to get the desired number for better inventory management, i.e., Reorder Point (ROP) = Demand during lead time + safety stock.
Reorder point in cost accounting is a level of inventory when a business makes a purchase or starts a manufacturing run for its next product. It’s the minimal stock amount for an item before you require replenishing to fulfill the customer demand.
If your medical inventory crosses a certain limit, you need to replenish the inventory. This level is considered the reorder point in pharmacy. It can help to prevent lost sales and ensure you fulfill the customer demand.
Managing your inventory and ordering your next batch on time using ROP can help you maximize customer retention.
You can enhance the overall experience by delivering the products based on the promised ETA.
At this stage, you can utilize Upper Route Planner to increase the delivery process efficiency and achieve same-day delivery targets.
Your delivery team can take digital proof of deliveries to minimize the delivery time and increase efficiency.
Access the 7-day free trial and experience the transformation in your delivery process.