How to Solve the Reorder Point Formula Inventory Management Strategy

how to calculate reorder points

Inventory management techniques are about making sure you have the right amount of product on hand at all times – no overstocking and no understocking. The bigger your company grows, the tricker this will get, because the reorder point is different for every product variant. For instance, fashion retailers need to solve the ROP formula separately for every color and every size of every item.

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In the next three months, you plan to place an ad in the newspaper and spend double on social media advertising. If your reorder point is still 500, you would run out of stock quickly and be forced to ask customers to place backorders or lose out on sales opportunities. Instead, you decide to increase your reorder point to 1000 so you can keep production and sales flowing smoothly. Bryson now knows that he needs to reorder the bikes when stock levels drop to 4,400. You can run the reorder point formula manually, but it’s a lot faster to use automated software. Remember that each step of the equation we just went through is something that needs to be run for every single product variant you sell.

Reorder faster with inFlow

Manually managing reorder points is possible but hardly efficient, especially as your business grows. This information is invaluable for setting reorder points that are not only effective but also efficient. This information prevents inventory managers from manually searching through spreadsheets and crunching numbers.

  • By taking all of these data points into consideration, you can determine when to reorder more inventory so that it arrives in time to avoid a stockout.
  • Knowing [your] business, including target, risk, and cost, is the first and necessary step [to setting reorder points].
  • That’s why it’s essential your business review the math behind its reorder points regularly.
  • With Sortly, it’s easy to gather the data you need to calculate reorder point, then plug that number right into your inventory details.
  • Having visibility into your inventory and set reorder points helps you know when to replenish inventory to prevent stockouts before it’s too late.

Getting your reorder points wrong can lead to lost sales, increased carrying costs, and even damage to your brand reputation. No matter what your category, if you have products you can’t sell, you either have to keep paying to store them, or you need to dispose how to calculate reorder points of them, which also comes with a cost. To save time on calculations, you can use our free reorder point calculator after working through the below explanation. Access the 30 days free trial and experience the transformation in your delivery process.

Best practices for setting reorder points

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 calculate reorder point and equip the buffer stock, you can ensure on-time deliveries for your customers and a quality customer experience. 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. With this reorder point method you place orders when you reach a specific date in a fixed order cycle.