In this article, we look into the reorder point formula, safety stock, and how you can take your order efficiency to the next level with ERP Manufacturing Software.
What is the Reorder Point?
The reorder point is a stock threshold that you don’t want to go below. The ideal inventory reorder point allows for adequate time to make a new order before your stock reaches this threshold. Reorder point is the metric that tells you two essential things:
When it is the right time to order more materials from your supplier(s)
When it is the right time to manufacture more products by creating a manufacturing order (MO)
This means your stock will be regulated much better, with fewer interruptions like supply-chain breakdowns or production bottlenecks.
Your inventory reorder point levels should cover every item in your inventory, including every product variation’s product recipe. Sound complicated? This is part of a bill of materials (BOM).
For example, Katana lets you set reorder points and highlights when you need to order more materials to keep ideal inventory levels.
The reason it’s important to learn how to calculate your reorder points is that as your business grows, and handles more products and SKUs, the more difficult it’s going to be to maintain your ideal stock levels. Next, let’s look into how to calculate your reorder point with the reorder point formula. This doesn’t have to be done by hand, you can get cloud-based software to do it for you, and let you know when you’re running low.
Automate and perfect your inventory management
1000s of manufacturers use Katana manufacturing ERP to automatically allocate materials to production and set reorder points. Take your inventory control to the next level for free.
To calculate your reorder point, you simply need to multiply the average unit sales by average lead time and include your safety stock levels.
Before calculating your reorder point, make sure you know your
average unit sales per day
the average lead time
the amount of safety stock you have on hand
Reorder point equation
This is how your reorder point calculation should look on paper:
Reorder point = (Average Daily Usage x Average Lead Time in Days) + Safety Stock
How to calculate safety stock and reorder point
To calculate your safety stock, which should be considered with your reorder point, you need to follow this formula: (maximum daily usage x maximum lead time in days) – (average daily usage x average lead time in days)
Depending on what you’re looking into, the average daily usage is the number of raw materials you consume, or finished goods you sell in one day.
What is the average lead time in days?
The average lead time in days is how long it takes for your raw materials to be delivered from a supplier or how long it takes you to manufacture a product. However, both the delivery time and manufacturing rate form a part of understanding your manufacturing lead time too.
Reorder point and safety stock
Your safety stock is your trump card in emergencies.
You shouldn’t have to keep dipping into it. The ideal reorder point ensures that your business does not dip below your safety stock levels. If you miss your reorder point and use some safety stock, you need to order even more materials to replace that safety stock once the supply order arrives.
If you don’t, your safety stock will eventually deplete down to nothing and, more orders cost more money, so you should try to avoid this.
Therefore, an ideal reorder point is typically a little higher than your safety stock level to factor in delivery time.
But how much higher does it need to be? It depends on the average lead time of your reorder and the average demand during the lead time. Why is this the case?
Well, let’s take a look at these two reasons:
Reason one – When you place a new order, it does not arrive at your warehouse immediately. It may take weeks or sometimes even months for the order to be processed and shipped to your desired location
Reason two – During the lead time, you keep using the remaining stock in your warehouse for your manufacturing and sales operations
Thus, a good reorder point also needs to take into account how much quantity of the ordered item is actually left in your warehouse by the time the reorder arrives.
It is essential to take this lead time into account. Otherwise, you run the risk of running out of stock before the reorder arrives. Your reorder point should make production in your business flow, not stop and start.
Setting your reorder point too late defeats its purpose.
Setting it too early means it sits around doing nothing for too long, increasing carrying costs and harming your bottom line. You can get more information on how to reduce lead time to increase customer satisfaction here. Reorder point calculation formula and safety stock calculation formula are in a way two sides of the same coin:
Safety stock – describes the amount of inventory a business keeps in the warehouse to protect against spikes in demand or shortages in supply
Reorder point – is the last line of defense before you resort to using safety stock, and opening backorders. It keeps your safety stock in reserve for true emergencies only and makes sure that each material you use is reordered in line with its usage
Therefore, you don’t have an overabundance or drought of stock.
You get a perfect balance, safe in the knowledge that you can deal with anything, and still keep going. Read on to find out how to use a reorder point formula to set your reorder point.
Reorder point formula Excel
You can calculate your reorder point in an Excel spreadsheet (or a Google sheet, or another sheet) with the following reorder point formula — =SUM(F2+G2) — where Column F is Safety stock, and Column G is Lead time demand.
Here is an example of the formula in action:
Using this removes the headache of calculating your reorder point yourself.
PRO TIP: Knowing the difference between your reorder points and safety stock is one thing, but finding the right levels for both is another. That’s why many direct-to-consumer manufacturers use a Shopify order management system to help them calculate these points.
Reorder point formula and safety stock formula combined
Let’s put the reorder point formula to the test and use it in a scenario so you can get a better understanding.
Firstly, just for the recap, the reorder point formula is:
Reorder Point = (Average Daily Usage x Average Lead Time in Days) + Safety Stock
So, let’s say you’re a manufacturer that:
Uses 10 units of a specific raw material per day
Has a resupply or delivery of this raw material that takes 7 days to arrive
Keeps a safety stock level of the raw material at 50 units
Using this information, your reorder point formula is going to look like this:
(10 x 7) + 50 = 120
Using the reorder point formula, you can calculate that your reorder point is 120 units. The moment your inventory levels fall below this number, you’re going to need to place a new order.
Reorder quantity formula
Now you know how and when to order new materials to avoid stockouts. However, the real question is how much material do you have to order to keep your productions running smoothly.
Reorder Quantity for Raw Materials = Average Daily Units Used x Average Lead Time
Using the example above, a manufacturer who uses 10 units of raw material a day and has a delivery time of 7 days for a resupply would mean the reorder quantity formula would look like this:
10 x 7 = 70
The reorder quantity formula is going to help you calculate your reorder point formula.
The difference between the two is:
Reorder point – A trigger that notifies a manufacturer or manager that they need to order more inventory
Reorder quantity – The amount of a particular item that needs to be reordered
Material requirements planning software
Katana material requirements planning software helps 1000s manufacturers maintain control of raw materials and final products in real time. Take your inventory control to the next level for free.
Perfect your order fulfillment with your accurate reorder point policy
When calculating reorder point levels, pay attention to changes in the underlying metrics. Daily usage and lead-time are not carved in stone. Like everything else, they are subject to change, which means your reorder points are too.
So, although having an effective reorder point policy means you have freed up more time in your week, you still need to stay on top of things by making new reorder point calculations.
Reorder point levels may increase as your business grows and they may fluctuate depending on whether you are approaching high or low season.
Thus, you should recalculate reorder point levels from time to time. A good tip to follow would be to revisit these calculations every 3-4 months. However, using inefficient spreadsheets can be tedious, time-consuming, and lead to business damaging errors. This is why many manufacturers and managers turn to ERP manufacturing software, like Katana, to help them automate their reorder points.
Reorder faster and more efficiently with Katana ERP manufacturing
Katana ERP manufacturing software is an all-in-one solution that allows manufacturers to take control over their:
Inventory management (raw materials, WIP, and finished goods)
Production planning and scheduling
Using production and shelf-life management software like Katana allows your company to set reorder points for each raw material and finished product variant under your roof.
Everything is tracked automatically, so you can prevent cognitive overload as your business grows. Increased success and sales demand do not have to become a burden. Katana flags the product and material variants that have dipped below their reorder point automatically allowing you to easily identify the areas that require action.
It’s an automatic alarm clock that tells you when you need to place an order so you never miss a deadline, and get your customer wait times to a record low.
This makes setting up and managing your reorder points a breeze, as well as saving you time, reduces the chance of human error by removing spreadsheets, and streamlines your entire production process.
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