In this quick guide, you’ll learn what it is, why it matters, and how to calculate it using a handy reorder point calculator.
What is the reorder point?
Constantly experiencing stock shortages? Unable to meet demand? Need more cash? The reorder point (ROP) can help.
The reorder point or ROP is the inventory level at which a company should replenish stock to avoid shortages and stockouts. This level varies depending on factors like demand variability, lead time, safety stock, basic stock, and supplier reliability. For instance, if a supplier always delivers a product promptly—and sometimes even ahead of time—you’ll have a lower ROP.
Knowing the ROP benefits established businesses that have been selling products for years and new ones that are just starting.
But why exactly is the reorder point important?
There are several reasons:
- Avoid stockouts: The correct ROP helps you order stock at the right time to replenish it promptly to avoid stockouts and shortages.
- Optimize inventory levels: Replenishing stock at just the right time helps you maintain an optimal inventory level where you have just enough stock to meet demand without having too much capital tied up.
- Boost cash flow: Minimizing the capital tied up in stock improves your cash flow, giving you money for other important business purposes like expansion.
- Reduce lead times: Having the correct ROP ensures you receive new inventory on time to fulfil customer orders promptly.
How do you calculate the reorder point?
You can calculate your ROP using our handy reorder point calculator. Simply fill out the fields and click Calculate.
This calculator is based on the following ROP formula:
(Lead Time + Safety Stock + Basic Stock) * Unit Sales Per Day
Where:
- Lead time = the days between issuing a purchase order and receiving the product(s).
- Safety stock = the number of days’ worth of inventory you keep in case of emergency.
- Basic stock = the number of days’ worth of inventory you usually keep on hand.
- Unit sales per day = The average number of products you sell daily.
For example, let’s assume that for a particular product, you have a lead time of 5 days, a safety stock of 15 units, and a basic stock of 35 units. If you sell an average of 80 units per day, your ROP will be:
ROP = (5 days + 15 units + 35 units) x 80 units per day
ROP = 55 x 80
ROP = 4400 units
To avoid stockouts, you should order new stock when you have 4400 units left.
Easily calculate reorder point with Fishbowl today
Fishbowl’s reorder point calculator helps you maintain the right inventory levels to meet demand without carrying excess stock. It’s a small part of the advanced inventory management features in Fishbowl Manufacturing and Fishbowl Warehouse.
Not only can you use it to automatically update and calculate your optimal ROP overtime without any manual calculations—thereby reducing human error and increasing efficiency—but you can track factors influencing it like sales trends, demand changes, and supplier history. Want to see it in action? Join thousands of businesses that use Fishbowl to simplify their inventory management. Book a demo today.