Holding the optimal amount of stock in storage at any one time is more difficult than it sounds. eCommerce business owners need to strike the balance between being able to meet customer demand while avoiding unnecessary storage costs due to overstocking.
Thankfully, one way to get this right is to use Reorder Point Formula (FOP) to calculate your reorder level, eliminating the need for guesswork and using your gut instinct to make decisions.
In this article
What is a reorder level and why is it important?
A reorder level is the point at which businesses order new stock from the supplier. In most cases, each SKU will have a specific reorder point, which is met when the number of SKUs in storage falls to a predetermined level. Once the SKU reaches this level, stock should be replenished as soon as possible.
As an example, let’s imagine Luke has a business selling dog leads. One of his most popular leads has a reorder level of 25. Luke has 60 leads in stock, but after a week he ends up selling 35 leads, and now only has 25 remaining. As Luke knows his reorder point is 25 for this type of lead, he makes a new order with his supplier.
The purpose of the reorder level is to ensure that the risk of an item going out of stock is minimised. If there’s a sudden surge in demand, delays from the supplier, or a bulk order, the breathing room given by the reorder point should, in theory, still prevent items going out of stock. It also takes into account the expected amount of time it takes for items to reach your warehouse from the moment you make an order with the supplier.
What is the Reorder Point Formula?
The formula itself is pretty simple; you don’t need to be a brainiac to use it! Here it is:
Reorder point = total lead time demand + safety stock
You’ll need to understand how to calculate your lead time demand and safety stock before using ROP, which, thankfully, is also fairly simple.
How to calculate total lead time demand
Your lead time is the amount of days it takes for you to receive a certain product from the time you initially placed the order. To calculate lead time demand, you simply need to multiply it by the average daily sales of that particular unit:
Total lead time demand = lead time in days x average daily sales
How to calculate safety stock
Your safety stock is the buffer you have in place in case of unforeseen stock issues, such as a sudden increase in demand, issues with suppliers, or any other supply chain disruption. To get an optimal safety stock calculation for a particular product, you’ll need to do three basic calculations.
The benefits of calculating reorder level
There are many benefits to using the ROP to calculate reorder levels. As an eCommerce business, you’ll likely be constantly looking for ways to make your operations more efficient and more cost-effective. The ROP is designed to assist you in achieving those goals.
Better customer service
As a customer, there’s few things more frustrating than needing a product that’s no longer in stock. Likewise, if a regular customer returns to your online store to find that their favourite products are continuously out of stock, you wouldn’t blame them for taking their business elsewhere.
Calculating your optimal reorder level for each product can help you to give your customers a consistent high level of service.
Reduced storage costs
While you might not notice it much at first, regularly storing more products in your warehouse that are required can lead to significant – and unnecessary – storage costs. While it may be tempting to overstock so you have inventory to fall back on, doing so can cause more harm than good in the long run.
Ambitious eCommerce businesses looking to grow and Scale Up need to spend their budget effectively, and omitting unnecessary storage costs frees up capital for other areas, whether that’s marketing, technology, or growing your team.
Use the FOP to accurately create the buffer you need without overpaying for storage.
Understand your business better
Using data to reorder inventory rather than your gut feeling has knock on positive effects. You’ll naturally need a good understanding of your data to work out a reorder point calculation, and you can use this data in other ways. This includes identifying seasonal trends, forecasting demand, and a deeper understanding of inventory health.
Factors that can affect your reorder point calculation
The demand for many types of products varies depending on the year. The Reorder Point Formula assumes that demand is constant throughout the year, and as such, won’t be accurate if demand is not consistent. Therefore, you should only use the FOP for products that have similar levels of demand throughout the year.
Similar to demand, the FOP assumes that your lead time for items bought from the supplier is consistent throughout the year. If you’ve been working with the same suppliers for a long time, you may have a good understanding of their reliability, or specific agreements in place to ensure lead times remain consistent.
However, if you continuously work with different suppliers, or your supplier is not consistent in the time they take to fulfil your orders, you may find that calculating your reorder level accurately using the FOP to be difficult. It works best when you have a reliable supply chain and good relationships with your suppliers.
Time is of the essence when it comes to your reorder point calculation. The Reorder Point Formula assumes that the order will be placed as soon as the calculation is made. Therefore, if you wait a few days to make your order with the supplier, the accuracy of the calculation will suffer.
Regain control of your inventory with James and James Fulfilment
James and James are a 3PL provider that makes managing your inventory easy. Thanks to our award-winning software, ControlPort, you have full control and clarity over the status of your inventories at all times, right across our international network of fulfilment centres.
It’s super easy to set up reorder points on ControlPort, so you’re automatically notified when products are running low. Additionally, ControlPort integrates with all the major shopping channels like Amazon and Shopify, and most of the less common ones, too.
Simply ship your products to any of our fulfilment centres, where we’ll store them. Then, when orders fly in, we’ll pick, pack, and ship them to where they need to be, quickly, reliably, and cost effectively.
Ready to learn more? Get in touch with our fulfilment experts to find out how we can help your business sell, grow, and Scale Up.