The reorder point, often referred to as the reorder level, is a specific inventory threshold that signals when it’s time to replenish a particular item. Essentially, when the inventory level of an item drops to the reorder point, a new purchase or production order should be placed to restock the item before it runs out.
The primary goal of the reorder point is to ensure that stock remains available while new stock is being ordered and received, thus preventing stockouts which could disrupt operations or sales.
The basic formula to calculate the reorder point is:
Reorder Point = Lead Time Demand
- Lead Time Demand is the expected demand for the item during the lead time (the time it takes for the replenishment order to arrive or be produced).
For businesses that want an extra buffer to account for unexpected spikes in demand or potential delays in lead time, a safety stock might be added:
Reorder Point (with safety stock) = Lead Time Demand + Safety Stock
The main factors to consider when determining the reorder point are:
- Average Daily Demand: This is the average number of units of the item that are used or sold per day.
- Lead Time: The time it takes from placing an order to receiving the goods or producing them.
- Safety Stock (if applicable): An additional amount of stock kept as a buffer against unexpected increases in demand or delays in supply.
Regularly reviewing and adjusting reorder points is essential, especially if there are changes in demand patterns, lead times, or business goals.
Example of the Reorder Point
Let’s use a fictional scenario to illustrate the concept of reorder point.
Example: “Tom’s Bike Shop”
Background: Tom owns a bike shop and sells a popular model called the “TrailBlazer.” He wants to determine the reorder point for this bike to ensure he always has stock available for his customers.
- Average Daily Sales: On average, Tom sells 5 “TrailBlazer” bikes every day.
- Lead Time: The supplier, from the point of order placement to delivery, takes 7 days.
- Safety Stock: Tom wants to keep a safety stock of 10 bikes to account for unexpected demand surges or supply delays.
Reorder Point Calculation:
- Lead Time Demand:
Lead Time Demand = Average Daily Sales × Lead Time
Lead Time Demand = 5 bikes/day × 7 days = 35 bikes
- Reorder Point (with safety stock):
Reorder Point = Lead Time Demand + Safety Stock
Reorder Point = 35 bikes + 10 bikes = 45 bikes
When Tom’s stock of “TrailBlazer” bikes drops to 45 bikes, he should place a new order with his supplier. This ensures that even if he sells 5 bikes a day, he will have enough bikes (35 bikes for 7 days) to meet the demand during the 7-day lead time, plus an additional safety stock of 10 bikes as a buffer against unexpected scenarios.
This example highlights the utility of the reorder point in inventory management, helping Tom prevent stockouts and ensuring a smooth sales process for this particular bike model.