The two critical components of all reorder point calculation scenarios are:

Whether you’ve just started a new business or you’ve sold products for years, anyone can benefit from using the reorder point formula. This post will show you what that is, why it’s useful, and which numbers you’ll need to generate a reorder point.

How to calculate your reorder point

The reorder point (ROP) is the minimum stock level a specific product can reach before you’re prompted to order more inventory. But I’m sure you already knew that!

A reorder point is not a static number. It’s based on your own purchase and sales cycles, and it varies on a per-product basis. However, once you have a handle on the patterns of a product, you’re ready to start putting the variables together.

The reorder point formula is daily unit sales multiplied by delivery lead time, with some safety stock for good measure. 

The reorder point formula video

If you’re the type who likes to watch instead of read, we’ve created a video version of this post. The examples are a little different, but the formula is exactly the same. Peter covers the reorder point formula in just three minutes:

The Reorder Point Formula | inFlow Inventory

Calculating average daily unit sales

OK! Back to the post at hand. The first variable is simply the average amount of that product you sell on any given day. Let’s examine the fictional company, Archon Optical, and their Ghost glasses. Here are the sales of the Ghost over the last three months:

If we total those numbers, we get 180 total units sold over the past 90 days.

That means that the average daily sales for the Ghost is 2 per day.

Calculating average delivery lead time

Average delivery lead time is the time it usually takes for product shipments to arrive. You should have a couple of purchase orders on-hand to check the numbers. Delivery times can vary based on the quantity you order (larger orders could take longer to ship). When you place the order also affects the lead time (compare orders during a busy season versus a slow season). There are different ways to calculate this, but a three-month average is a good start.

Here are a few Archon Optical purchase for the last three month of Ghost shipments:

Add the total delivery time (15 days ) and divide it by the number of orders (3 orders). That’s an average lead time of five days for the product to arrive.

In this example the lead time is calculated on the vendor level not at the item level. It does not account for multiple receiving locations and or different lead time per item.

How to calculate safety stock quickly

Safety stock is similar to a reorder point, but it’s a surplus quantity to ensure that you don’t run completely out of stock if there are delays.

When deciding on a safety stock level you’ll want to consider: average daily sales and the daily average that product used in work orders (if applicable). Lead time is also important to safety stock. 

We’ll keep things simple by calculating based on two weeks of extra demand (14 days). This number is an estimate based on what we’ve seen from other small businesses. But keep in mind this number will vary. If you’re dealing with a product that has a shelf life, such as food, you should try considering changing safety stock levels to days instead of weeks.

Since the average daily sales for the Ghost are 2 (as calculated earlier on this page), that means the safety stock for Ghost is about 14 x 2 = 28.

[We’ve also written a more detailed article on safety stock, if you’d like to calculate it based on lead-time demand.]

Putting the reorder point formula together

Now that we’ve got all of the Archon Optical numbers down, we’re ready to put together a reorder point for the Ghost.

When the quantity on-hand for Ghost glasses hits 38, Archon Optical knows to place a purchase order for more. Because they’ve built an average delivery lead time into the reorder point, the extra Ghost glasses should arrive before Archon ever dips below the amount of safety stock.

Even if there are production shortages or shipping delays, Archon Optical’s safety stock ensures that they can sell Ghost glasses for two more weeks before they run out of stock.

Set a basic reordering reminder in a spreadsheet

Reorder points are vital to keeping your business running smoothly, but they’ll only work if you’re prepared to reorder on time.

If you’re a spreadsheet user, you can use conditional formatting for the quantity value of specific cells. You can set Excel or Google Sheets so that cells turn red when they hit a reorder point. This will effectively warn you when you need to start on a new purchase order.

Reorder faster with inFlow

Unlike spreadsheets, inFlow was designed specifically for working with inventory. Quantity and reorder point fields are built into the apps. This saves our customers a lot of setup time.

inFlow Cloud has a Reorder Stock window, which identifies which products need reordering, and creates new purchase orders with just one click.

If you’d like to implement reorder points with tailored suggestions for your business, we can help with that too!

inFlow Cloud has a Recommended Reorder Point report that examines your sales data and recommends reorder points for your products. It also factors in goods in transit (GIT), which are products that have been ordered from a vendor but haven’t been received yet.

Whether you’re just starting out with reorder points or fine-tuning them, inFlow Cloud can help!

Try inFlow Cloud free

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A reorder point (ROP) is a specific level at which your stock needs to be replenished. In other words, it tells you when to place an order so you won’t run out of stock.

Significance of reorder points

If you’re a business owner, knowing when to order more stock is important. If you order when you still have a lot of stock on hand, it will lead to extra stock piling up, which will increase your holding costs. If you order when you have zero stock on hand, you’ll be unable to make sales for as long as it takes to receive the order. The your vendor takes to supply the items, the more sales you’ll be losing. Setting a reorder point helps you optimize your inventory, replenish your stock of individual items at the right time, and meet your market demand without going out of stock.

How to calculate a reorder point

You need to know when to order each item in your inventory separately, because different items have different sell-through rates. To calculate the ROP for each item, you’ll need to know the following parameters:

Lead time: Time taken (in days) for your vendor to fulfill your order

Safety stock: The amount of extra stock, if any, that you keep in your inventory to help avoid stockouts

Daily average usage: The number of sales made in an average day of that particular item

Reorder Point Formula

Let’s look at how to calculate a reorder point both with and without safety stock. Then we’ll cover how to handle reorder points when you have multiple vendors.

• Determining ROP with safety stock
• Determining ROP without safety stock

Determining ROP with safety stock

This method is used by businesses that keep extra stock on hand in case of unexpected circumstances. To calculate a reorder point with safety stock, multiply the daily average usage by the lead time and add the amount of safety stock you keep.

Let’s understand this with an example. Suppose you’re a perfume retailer who sells 200 bottles of perfume every day. Your vendor takes one week to deliver each batch of perfumes you order. You keep enough excess stock for 5 days of sales, in case of unexpected delays. Now, what should your reorder point be?

Lead time = 7 days Safety stock = 5 days x 200 bottles = 1000 bottles

ROP = (200 x 7) + 1000 = 2400 bottles

The order for the next batch of perfume should be placed when there are 2400 bottles left in your inventory.

Graph 
This simplified reorder point graph shows you the relationship between your reorder point, stock level, and safety stock over a period of time. It helps you visualize how your reorder point is based on your sales trends.

In the above graph, the maximum level is the sum of the safety stock and the order quantity, or 3400 bottles. Once the stock left in your inventory reaches the reorder level of 2400 bottles units, you should place a new purchase order with your vendor. The minimum level, which is 1400 bottles, will help you fulfill your orders until your ordered stock reaches the warehouse. Once the new order is received in your warehouse, the stock level returns to the maximum level of 3400 bottles units.

Determining ROP without safety stock

Businesses which follow lean inventory practices or a just-in-time management strategy usually don’t have safety stock. In such cases, your reorder point can be calculated by multiplying your daily average sales by your lead time. Typically, when you don’t have safety stock, your reorder level and the frequency of your orders tend to be higher.

Taking the above perfume example without including safety stock, your ROP should be:
ROP = 200 x 7 = 1400 bottles

Therefore, you should place an order for the next batch of perfumes when you have 1400 bottles left.

How to calculate ROP with different vendors

You may purchase items in your inventory from various vendors, and different vendors have different lead times. Therefore, it’s best to think of your reorder point on an individual item level.

For example, let’s suppose that you’re a retailer who sells water bottles and snack boxes. The two items are purchased from different vendors with different lead times. The water bottles take one day to get delivered (lead time = 1 day) and the snack boxes take four days (lead time= 4 days). In a typical day, you sell 5 water bottles and 10 snack boxes.

Without safety stock, your ROP with the vendor who delivers the water bottles should be: ROP = 5 x 1 = 5 bottles

When you have 5 bottles left, that means you have one day of sales before you run out of stock. Since your lead time is also one day, the new stock should arrive just in time for you to continue selling without interruption.

Similarly, your ROP with the vendor who delivers the snack boxes should be ROP = 4 x 10 = 40 boxes

You should reorder when you have 40 boxes of stock left in your inventory, which is four days of stock. Given that your lead time is also four days, the new stock should arrive just in time for you to continue selling without interruption.

A reorder point is crucial for effective inventory management. It saves holding costs and prevents stockouts, overstocking, and lost sales by ensuring that sufficient stock is always available in your inventory.