Reorder Point Formula: This Is What You Need to Avoid Stockouts

Do you really need a reorder point formula to effectively manage your inventory?

Do you know when you’ll need to order more inventory before selling out?

Have you already experienced a few stockouts and don’t how to prevent them?

Are you relying on your “instincts” to calculate your reorder point?

You can stop being a victim to market spikes and slumps by using a proven, mathematical equation to help you consistently order the right amount of stock each month.

This equation is called a reorder point formula.

To help you improve your business processes, we’ll show you what a reorder point formula is, how to apply it effectively, and how to stop worrying about running out of stock.

By the end, you’ll be empowered with a formula that’ll help you stay on top of demands and streamline your supply chain management by accurately calculating your reorder quantity.

What is a Reorder Point Formula and How is it Calculated?

A reorder point formula tells you approximately when you should order more stock – when you’ve reached the lowest amount of inventory you can sustain before you need more.

Here’s the reorder point formula you can use today:

(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point

To make this as easy as possible for you, we’ll show you how to calculate your average unit sales and lead time.

You will need to know your safety stock to make this formula work, but instead of going over that in this post, you can discover how to calculate your safety stock by visiting our post “The Power of Safety Stock Inventory and How to Calculate It.”

For the other two calculations, let’s start with daily unit sales.

How to Calculate Average Daily Unit Sales

Your average daily unit sales is the number of units you sell of a particular item over a specified period of time.

To take that out of the abstract, let’s use an example for the rest of this post to make it easy to understand.

Suppose you sell staplers.

To calculate your average daily unit sales, you would divide how many units of staplers you sold over a specified period of time.

If you sold 100 staplers over 30 days, you would divide 100 by 30.

100 divided by 30 = 3.33

So, your average daily unit sales is 3.33.

Let’s continue this example into average lead time.

How to Calculate Average Delivery Lead Time

The lead time is the amount of time it takes to receive a shipment of stock.

To get the average delivery lead time, you divide your total number of lead times by a set period of time, like 6 months.

In our stapler example, if you place an order every month, your lead time probably varies month-to-month and may look something like this:

Here’s how you calculate your average lead time:

Add up all the days (8+11+9+6+7+5) = 46.

Divide the total (46) by the number of orders placed, which is 6 because orders were placed once a month over 6 months.

46 divided by 6 = 7.67

7.67 is your daily average lead time.

Now that you have your average lead time and unit sales, you need to calculate your safety stock.

Again, we won’t go over that here, but you can easily calculate it using our formula in our other post on safety stock inventory.

For our purposes, let’s assume your safety stock is 20 staplers. Now, we’re ready to use our reorder point formula.

How to Calculate the Reorder Point Formula

Now that we’ve got all the numbers we need for our Stapler company example, we’re ready to plug everything into our reorder point formula.

Remember, the formula is:

(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point

So, for our stapler example it would look like this:

(3.33 x 7.67) + 20 = 45.54

There you have it.

In our example, once your inventory gets down to 45 or 46 staplers, you should place an order for more.

This is a simple reorder point formula that you can use for each of your products. There are certainly more in-depth formulas you can use like this one, but the formula we’ve provided should be sufficient for most businesses.

However, just knowing the reorder point formula isn’t enough to streamline your business processes…

Here’s What You Need Next

To streamline your business, you’ll need to improve your rate of inventory turnover, upgrade your SCM software, and accelerate your stocktaking process.

But to make these processes and the reorder point formula work properly, you’ll need some way to track your orders, sales, and inventory levels

An Excel spreadsheet or pen and paper are error-prone methods that are dangerous and costly, especially when your business depends on correct and highly specific data.

If you want to manage your inventory with ease, receive real-time reports, and streamline your supply chain management, then you need to invest in cloud-based inventory management.