Managing inventory accurately and effectively is an essential, ongoing part of any e-commerce business. From knowing how to keep track of inventory to learning how to calculate inventory turnover ratio, e-commerce fulfillment is a lot to master. Knowing how much is in stock versus what’s been shipped to customers, in addition to knowing when to reorder inventory and how much of each is needed is a lot to keep track of, to say the least. Fortunately, there are several formulas you can use to your advantage to help you make strategic decisions to grow and scale your business. One of the key data points is the reorder point formula.
From reorder quantity to inventory level, calculating reorder point can be helpful to understand your safety inventory, reorder point method, and handling excess inventory. So, what is the reorder point formula exactly?
The reorder point formula is used by businesses to determine the right time to restock inventory. To calculate the reorder point, take your business’ lead time demand and the safety stock calculation.
Lead Time Demand + Safety Stock = Reorder Point
In essence, it’s time to reorder stock when your current inventory equals the total number of items you expected to sell during a standard lead time from the supplier plus the safety stock. When learning how to calculate reorder point results, you must first calculate lead time demand and safety stock. If you aren’t sure how to calculate safety stock, we have you covered.
Lead Time Demand and Safety Stock Calculations
To calculate lead time demand for your business, calculate the average number of product sales your business experiences daily. Then, multiply by your supplier’s average lead time. This is the time between when a purchase order is placed and when the purchase order is fulfilled.
For example, if you sell kitchen appliances, and the average number of blenders you sell per day is 10, and your supplier’s delivery time is approximately 30 days, on average, that would make your lead time demand 300.
Lead time demand = average lead time x average daily sales
The lead time demand on its own gives you a good idea of your reorder point, though it’s best to be prepared for a potential influx of sales while you wait for your stock to be replenished. The safety stock level accounts for this, as well as takes into account any delays on the supplier side that will increase the average wait time.
To calculate your safety stock figure, identify the maximum number of products you could potentially sell in a single day. Multiple this number by the maximum number of days in your supplier’s lead time. Then, subtract the lead time demand.
Keeping with the kitchen appliance example, say the average order of blenders is 10, but there’s been a maximum daily order of 15, previously. Use this number multiplied by the longest lead time you’ve waited on a new order from a supplier. Though it usually comes in four weeks or 30 days, perhaps the longest time has been 40 days. Therefore, the safety stock calculation would be 300, based on the following:
Safety stock = (15 maximum daily orders x 40 days maximum lead time ) – (300 for lead time demand)
Establishing lead time demand and safety stock numbers based on your unique data is how to calculate the reorder point for your business. Setting accurate reorder points allow you to avoid surplus, which helps to lower the cost of paying storage for the extra inventory. And, it also ensures you have enough products in stock at the time customers want them. The result: better inventory management and higher revenue returns.
Knowing When to Reorder Inventory Is Key to Improving Sales
Manually calculating your reorder point formula or using a reorder point calculator to plug in numbers help with sales predictions by taking into account contingencies for extended supplier lead items and reordering processes. Using this formula to manage your inventory can help minimize costs and stockouts and provide better demand forecasting as your business grows.
Implementing an inventory tracking system helps automate the process and provide data reports that immediately identify the calculations necessary to make strategic decisions. Rather than guessing how much inventory you need to stock and how often, you can make a calculated decision on what’s best for your company based on historical results. This allows you to conduct reorder point planning that coincides with customer demand, average daily unit sales, and buffer stock.
However, keep in mind seasonal trends can alter the demand for your product. During the height of shopping season for the year, it’s best to recalculate your safety stock to ensure you have the maximum amount of units available to meet the predicted influx of sales. This may be during the holidays or could be the beginning of the school year, spring break, or other documented peak sales season.
At Flowspace, we provide inventory management software that helps adjust your reorder point formulas based on these seasonal trends and product popularity. Calculating when to place a new order helps to reduce the number of overstock products, while ensuring there’s enough inventory to fulfill the incoming orders as you wait for new shipments to arrive. This allows you to maintain higher inventory efficiency and ultimately, improve customer satisfaction and generate new sales.
Learn more about how a partnership with Flowspace can grow your business. Submit a quote today!