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Whether you&#;ve just started a new business or 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.

Check out this short clip from our new podcast for a quick rundown of reorder points and safety stock and their importance in inventory management.

Secret Life of Inventory | Reorder Points and Safety Stock

How to calculate your reorder point

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

A reorder point is not a static number. A reorder point is based on your purchase and sales cycles and varies by product. 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. Below, you can see what the reorder point formula looks like written out:

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 slightly different, but the formula is the same. Peter covers the reorder point formula in just three minutes:

The Reorder Point Formula | inFlow Inventory

Why is setting a reorder point so important? 

Before we get into the reorder point formula, let&#;s quickly review the importance of reorder points. Here are some of the ways reorder points will help your business:

• Avoid stockouts&#;Stockouts occur when a business runs out of inventory and can no longer process a customer&#;s request for purchase. Obviously, this will lead to dissatisfied customers who won&#;t wait around for you to restock. They&#;ll simply take their business elsewhere, probably for good.
• Avoid overstock&#;The flip side of stockouts is carrying excess inventory. The carrying costs associated with excess inventory add up quicker than you may realize and will eat into your bottom line. 
• Reduce shipping costs&#;By setting proper reorder points, you can avoid the need for frequent orders, which will save you a ton in shipping costs over time. 
• Improve forecasting&#;With accurate reorder points, you&#;ll be able to anticipate your business needs, which will ultimately lead to less rushed orders or last-minute panic buying.

Calculating average daily unit sales

OK! Now that we understand why the reorder point formula is so vital let&#;s take a closer look at it. The first variable in the reorder point formula is simple. It&#;s the average amount of a specific product you sell on any given day. To help illustrate, 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

Another component of the reorder point formula you&#;ll need is the average delivery lead time. This is the time it usually takes for product shipments to arrive. You should have a couple of purchase orders handy to check the numbers. Delivery times can vary based on your order quantity (larger orders could take longer to ship). When you place the order, it also affects the lead time (compare orders during a busy and slow season). There are different ways to calculate this, but a three-month average is a good start.

Here are a few Archon Optical purchases for the last three months of Ghost shipments:

Add the total delivery time (15 days ) and divide it by the number of orders (3). 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 or different lead times per item.

How to calculate safety stock quickly

When you calculate a product reorder point, you&#;ll need to account for safety stock. Safety stock is a surplus of products your business would keep in case of an emergency. For example, maybe you saw a random spike in your sales numbers, or there was an extreme delay in delivery times due to unforeseen circumstances.

When you decide on a safety stock level, you&#;ll want to consider average daily sales and the daily average you use the product in work orders (if applicable). Lead time is also essential to safety stock.

You can get more granular when calculating your safety stock, but here is a simplified way. First, multiply the maximum number of daily orders by the maximum lead time. Then, multiply the average daily orders by the average lead time. The difference in these two numbers will be your safety stock. 

For example, Archon Optical&#;s historical data shows that their top sales on Ghost glasses in a single day was 4, and the longest they waited for a shipment was 10 days (4 x 10 = 40). They also calculate that their average daily sales over a year for the Ghost glasses is 2, and they wait, on average, 6 days for a shipment to arrive (2 x 6 = 12). In this case, their safety stock would be 28 (40 &#; 12 = 28). 

If you&#;re dealing with a product that has a shelf life, you should consider changing safety stock levels to days rather than weeks.

[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 the Archon Optical numbers for the Ghost glasses, we&#;re ready to put these numbers into the reorder point formula. Here&#;s what that looks like:

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 dips into their safety stock.

Even if there are production shortages or shipping delays, Archon Optical&#;s safety stock will give them padding to fall back on, which will ensure they don&#;t encounter any stockouts.

Setup reorder points 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. You can setup a formula somewhere in your inventory list with the reorder point formula, so you can make quick calculations for your products individually.

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. You can also set up a formula somewhere in your inventory list with the reorder point formula, so you can make quick calculations for your products individually.

We know it can be challenging to keep track of all these formulas, so we decided to create a handy Inventory Formula Cheat Sheet with 7 of the most common formulas.

Download your inventory cheat sheet now!

Reorder faster with inFlow

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

inFlow 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 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 can help! With inFlow there is no need for the reorder point formula at all! The best part is, using inFlow can help with so much more than just reorder points. inFlow integrates with over 95 different applications, such as Shopify, Amazon, and Quickbooks Online, to name just a few. If you want to set up a complete barcoding system, inFlow can do that too! Read our Ultimate Barcoding Guide to learn about barcodes and how to start barcoding your business.

No credit card required. Sign up now!

Supply Planning: Definition, Process, and Best Practices

Supply planning is a business management tool that impacts supply, demand, and inventory levels. Retailers use supply chain planning systems to provide projected demand for products and materials needed to support those demands. 

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The process is designed to balance plans for future demand with the availability of goods in inventory. Supply planning helps companies determine how much product they need to keep in stock. Order entry, review and release of orders with suppliers, and inventory management within warehouses and distribution channels are all factors that inform the supply planning function. 

The lead times for supplier products to be received, the complexity of managing multiple vendors, the need for material handling equipment, and the availability of labor complicate the process. Let&#;s take an in-depth look at the supply chain planning process and its best practices.

What Is Supply Planning?

Supply planning is a process that involves analyzing demand forecasts, comparing the forecasted demand to existing inventory, and coordinating the supply chain activities needed to meet that demand. It determines the production level of goods or services, the materials that are required, and when they must be acquired. 

Supply planning, also known as raw material or material planning, is often the cornerstone of optimized supply chain management. A supply chain planning strategy is designed to ensure that the right product is available at the right place and time while minimizing costs and risks associated with the supply chain. Inventory levels are intended to meet projected sales volume. 

Inventory management is vital to sales and operations planning because it affects sales volume and product pricing. The inventory levels are adjusted as demand volumes change. When there is a change in demand, there must be a production adjustment to align with the change, which may require companies to adjust inventory levels. 

Changes in sales volume directly affect inventory levels. Stores must control their inventories to meet customer demand. Doing these processes well can result in higher sales because inventory is available for customers when they want to make a purchase. They can support their companies by increasing sales and reducing costs by having the right amount of products on hand. 

The Supply Planning Process

The supply chain planning process involves coordinating the movement of goods, from raw materials to finished products, in a supply chain. Here are the steps in the supply planning process.

Forecast Demand

Forecasting demand for products is the first step in the process. It involves analyzing historical sales data and market trends to predict the level of product demand in the future. It is important to develop these forecasts regularly because there are many external factors &#; such as inflation or the inability to get raw materials due to trade sanctions &#; that could impact sales of your products. These potential disruptions must be considered when planning for future inventory requirements to support an efficient supply chain.

Demand can be determined by analyzing sales levels, historical data, customer surveys, and past trends. The forecast relies on sales forecasts because they show how market demand will change over the product&#;s life. 

Depending on the type of product you are selling, you must also project custom orders. You can project the custom order from various sources, and each custom order should be considered a separate demand element rather than a single lump sum for each item in the sale. It&#;s more efficient to handle your customers as individual buyers.

Determine Sources of Supply

Once the forecast demand is known, the next step is identifying the sources required to meet that demand. This process includes identifying suppliers, negotiating contracts, and establishing inventory levels.

For retail stores, this step involves identifying the supplier&#;s location and establishing a contract to buy products. For consumer goods producers, this step would include finding suppliers to provide raw materials for their production process. 

With this step, you may also identify changes in payment terms, such as requiring immediate payment or accepting open account credit terms with your suppliers. Your objective is to set up a supply plan that supports your business strategy while managing cash flow and working within your company&#;s budget allocations.

Schedule Production

Based on the forecast demand and the sources of supply, the company creates a production schedule based on the availability of goods necessary for production. Scheduling production affects the order of the usage of raw materials and the manufacture of finished products. 

It involves setting up production schedules to meet demand and coordinating with suppliers to schedule plant production runs. For example, a manufacturer may set up a production schedule based on raw material and labor availability, known as manufacturing resource planning (MRP). MRP is a computerized system that schedules resources to meet demand.

Plan Transportation

Plan the transportation of goods from the supplier to the manufacturer and from the manufacturer to the customer. This requires selecting carriers, coordinating with multiple carriers, and determining the most efficient modes and routes to get the product where it needs to be when it needs to be there.

Manage Inventory

Inventory management involves allocating space and other containers required for storing materials in a distribution center. It determines the optimal inventory levels to maintain for production schedules&#;

A key component of inventory planning is understanding what drives demand for an item. Inventory monitoring is automated to identify trends in the market, order patterns, and sales history. This information determines how much product should be acquired to have sufficient supplies before selling at the optimum price.

Monitor and Adjust the Plan

The supply chain planning process is ongoing, and the plan may need to be adjusted as market conditions change or new information becomes available. Regularly review and update the supply plan to ensure that it remains effective.

Why Supply Planning Matters

Supply planning is a vital function to ensure a company has enough raw materials to meet production demands. If a company lacks enough raw materials, it can lead to production delays, which can be costly and disrupt the smooth operation of the business. 

On the other hand, if a company has too much raw materials inventory, it can tie up valuable financial resources that can boost other sectors elsewhere in the business. Proper supply planning is, therefore, essential for maintaining an efficient and cost-effective production process.

An adequate supply plan helps a company strike the right balance between these extremes. It ensures enough inventory to meet customer demand while minimizing excess inventory and associated costs. 

A supply plan is the foundation of a company&#;s entire supply chain, including coordinating the procurement of raw materials and scheduling production. The effectiveness of the supply chain can impact a company&#;s profitability and its level of customer service.

Supply Planning Best Practices

Through continuous improvement efforts, supply chain planners work to improve sales and operations planning performance. Here are a few best practices to consider when planning your global supply chains.

Collaborate With Suppliers

Establish strong relationships with your suppliers and work with them to ensure a consistent and reliable flow of goods. To communicate with suppliers effectively, you should use a single system to request, track, and manage all customer requests.

Use Technology to Improve Supply Planning

Use technology to support and improve the supply plan. You can use various software applications, such as inventory management systems or sales forecasting software, to track inventory levels, delivery schedules, and other key performance metrics.

Implement Demand Forecasting

Demand forecasting involves assessing market trends to determine the anticipated level of demand for your product. It helps set production volumes, track product introduction schedules, and plan for future on-hand inventory levels. Use real-time data and analytics to anticipate demand and plan accordingly to help avoid shortages or overstocking.

Build Flexibility Into Your Supply Chain

While the supply chain is your customer&#;s lifeline to product availability, you must ensure it is flexible enough to meet changing needs. The components of your supply chain should include various elements that enable production in different quantities at different locations. 

You also need the flexibility to adjust production timing or manufacturing schedules when conditions warrant. Consider implementing multiple sources of supply and incorporating flexible manufacturing approaches to reduce the impact of disruptions.

FAQs

Here are frequently asked questions regarding supply planning and supply chain processes.

What is the purpose of supply planning?

Supply planning provides a framework for managing supply and demand in your company. The supply plan is designed to identify the most cost-effective and efficient methods for acquiring, stocking, and distributing raw materials, components, and finished goods. You may experience shortages or overstock and incur excess costs without proper supply planning.

What is demand planning vs. supply planning? 

Demand planning is forecasting the future demand for a company&#;s products or services and determining how much of those products or services the company will need to produce to meet that demand. Supply planning involves how to source, manufacture, and distribute the necessary products to meet the demand forecasted by the demand planning process.

Final Thoughts

The supply planning process is a critical component of effective logistics. Supply chain planning involves anticipating future demand and planning the most efficient methods of acquiring and distributing raw materials or finished goods. It ensures a timely supply of materials and finished goods.

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