Reorder point and safety stock
Your safety stock is your trump card in emergencies, but you shouldn’t have to keep dipping into it. The ideal reorder point ensures that your business does not fall 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 to nothing, and since more orders cost more money, 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 your reorder’s average lead time and demand during the lead time. Why is this the case? Well, let’s take a look at these two reasons:
- Delivery time — 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
- Material use — During the lead time, you keep using the remaining stock in your warehouse for your manufacturing and sales operations
Therefore, a good reorder point also needs to consider the number of ordered items left in your warehouse by the time the materials arrive. 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. Reorder point calculation formula and safety stock calculation formula are, in a way, two sides of the same coin:
- Safety stock — The amount of inventory a business keeps in the warehouse to protect against spikes in demand or shortages in supply
- Reorder point — 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 knowing you can deal with anything, and keep going. Read on to find out how to use a reorder point formula to set your reorder point.
How to calculate your reorder point?
To calculate your reorder point, you simply need to multiply the average unit sales by the 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: