Are you a business owner? If yes, then you may already know about the reorder point. If you don't, we will help you understand the reorder level in inventory management by explaining everything in detail in this article.
Reorder points are not only important for established companies but also for smaller businesses. We will help you with an easy formula to find out the reorder point. We will also provide you with tips to use the formula for increasing sales and revenue for your business. So, let us continue.
What Is A Reorder Point (ROP)?
Do you know what is reorder level in inventory management? Reorder point or level is the time when you have to restock or order new stock of a specific product. If you are in a manufacturing business, then you need raw materials for the production of goods. You have to order raw materials before they are out of stock so that your production efficiency doesn't get affected.
It is important to note here that your supplier may also take some time for the delivery of your demand. You have to know the average time taken by your supplier to figure out the reorder point. You have to know how much raw material is in stock, how much raw material is used every day, and how many days it takes for the delivery of your order.
It is not only related to the manufacturing businesses but also to the small stores that sell any type of products. For example, imagine that you own a mobile shop and sell products like mobile chargers and earplugs. You have to find out the reorder point for each product because your sales of each product can be different.
Why Is Reorder Point Important?
The reorder point is very important because it helps you identify the time when you should order products that are about to finish from the stock. When you find out the reorder level in inventory management, it helps you manage your money in better ways.
Every business owner wants to use their money more efficiently to make more profit. When you stock too many products, you have to invest more money, and you may also have to spend lots of money in storage. On the other hand, when you have minimum stock levels, it can reduce your sales because it is difficult to get the delivery of new orders quickly.
Therefore, you have to create a balance so that you don't need to overstock and, at the same time, you have enough product in stock to fulfil the demand.
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How Are Reorder Points Used?
Businesses find out the reorder level in inventory management to create a balance in the stock of products or raw materials. Business owners have to find out how many products they sell daily. Then, they have to know how many products are remaining in stock. They also have to know how many days it takes for the delivery of their demands.
Once you know all these details, you can easily find out your reorder point. It will help you save money, fulfil demands, and increase sales of your products.
Reorder Point Inputs
There are three main points that you have to consider to know your reorder level in inventory management.
- Lead time: Lead point is the time that your supplier takes for the delivery of your demand.
- Safety stock: Safety stock is the amount of products that you keep to avoid interruptions in your sales.
- Sales velocity: Sales velocity or demand rate is the number of products that you sell every day.
Reorder Point Formula
Let us see the reorder level formula to figure out your reorder point. Reorder point = (lead time × number of products you sell daily) + safety stock In this, the units of lead time and number of products you sell should be the same. For example, if the unit of the number of products you sell is in days, then the lead time should also be in days. If you are using weeks as units, then both lead time and your sale velocity should be in weeks.
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How To Calculate Reorder Level: A Step-By-Step Guide
It is important to know how to calculate reorder level. Let us imagine that you have a manufacturing business of automotive engines. You want to know the reorder point for cylinder heads that are used in the production of automotive engines.
Let us explore this step-by-step guide for your convenience.
Step 1: Find out how many cylinder heads are used daily in the production of automotive engines. Let us assume that you need 20 cylinder heads for production control. This will be your demand rate or sale velocity, which is required to know.
Step 2: Find out how many days your supplier takes to deliver cylinder heads after placing your order. This will be the lead time that is important to know the reorder level in inventory management. Let us say your supplier takes 10 days for the delivery of your order.
Step 3: You have to decide how many cylinder heads you want to keep as extras. This will be the safety stock, which will also be beneficial if the delivery of your order gets late due to some reasons. Let us say that you keep 40 cylinder heads as your safety stock.
Step 4: Put all the data in the formula to figure out the reorder level in inventory management.
Reorder point for cylinder heads = (lead time × number of cylinder heads you use daily) + safety stock ROP for cylinder heads = (10 × 20) + 40 = 240
This means that when you have 240 cylinder heads left in your stock, you have to order more cylinder heads.
Conclusion
When you run a business, you have to focus on many things to make profits. It is difficult to focus on every single detail of your business, and that’s why you can use cloud-based software like TranZact. TranZact helps all types of businesses to run smoothly and make profits. It can provide you with inventory software to record all the data. The software can automatically inform you about minimum and maximum stock levels, negative stock restrictions, auto inventory adjustments, etc. This way, you can easily track all the details of your inventory and figure out your reorder level in inventory management.
Reorder Level In Inventory Management FAQs
Q1. What are the important elements of the reorder point?
The number of products you sell or materials you use for production, lead time, and safety stock are important factors in calculating reorder levels in inventory management.
Q2. What are the benefits of reorder level in inventory management?
There are several benefits of reorder level in inventory management:
- Increase your sales
- Make more profit
- Reduce storage costs
- Fulfil demands for your products.
Q3. How do you calculate the reorder level in inventory management?
Find out the number of products you sell per day or week, lead time, and safety stock, and put all the data in the formula below. Reorder point = (lead time × number of products you sell daily) + safety stock
Q4. How do you determine safety stock for your inventory management?
You need to figure out the changes in demand and lead time to determine safety stock. Sometimes, the demand can be higher, and delivery of your order can be late. Therefore, you should keep extra products for better inventory management.
Q5. What type of businesses can benefit from figuring out reorder points?
Whether you own a retail store or wholesale shop or are involved in manufacturing, figuring out reorder points can help you save money and fulfil orders.
