Reorder point is a stage in inventory management when the number of units goes below critical level or when the inventory needs a refill. For example, if a manufacturing firm wants at least 100 product units in its inventory at any given time, a little over those 100 units would be its reorder point. The exact number can be determined only after accounting lead demand (starts when stocks are reordered and ends when the items arrive), delivery time (time it takes for stocks to arrive from reorder date) and safety stock (buffer stock to ensure zero stock scenarios). A good reordering point system ensures the inventory never goes below safety stock levels.
Reorder point planning is a critical aspect in inventory management. It’s not the same for all products and depends on the particular item’s sales cycles and respective delivery times. To make sure every sale is accounted for and reorder points are not missed, inventory management software comes in handy. The software becomes particularly essential when managing multiple stores and/or dealing with hundreds of sales each day. By the way, reorder point only indicates when to order and not the quantity to order. The actual order quantity could vary based on the sales forecasts made for forthcoming periods.
Calculating Reorder Point
To compute reorder point, lead demand, delivery time and safety stock must be considered. If the delivery time is a week and the daily sales is 100, lead demand would be delivery time multiplied by sales per day. The reorder point can then be calculated by adding lead demand and safety stock.
Reordered stock don’t arrive instantly since the supplier needs time to pack and ship the goods. There could be instances when the stock may come in earlier or later. This is why average lead demand and average delivery time must be considered when calculating reorder point.