Are you drowning in spreadsheets, constantly trying to figure out the right time to reorder stock? Well, look no further. Today, we’re diving deep into the art (and science) of how to calculate reorder levels. We’ll explore traditional methods, some advanced tactics for the bold, and how you can implement them into your very own inventory system. Intrigued? You should be!
What is a Reorder Level?
So, what exactly is a reorder level? Picture this: your petrol tank’s low-fuel light comes on. That light is your reorder level for inventory—it’s a signal, a nudge, a gentle slap on the wrist to remind you to reorder before you run out of stock. Just like your petrol tank, your e-commerce store’s inventory needs a signal so you don’t let stocks run to empty.
Accuracy in reorder levels is like finding that elusive parking space right in front of the shop. Nail it, and you’re golden—no lost sales due to stockouts and no money wasted on stocking products that sit idle in the warehouse. Get it wrong, and you’re left circling the block, losing time and patience. Translation: your bottom line and customer satisfaction are directly impacted.
How to Calculate Reorder Levels
Before we get into the formula, let’s break down what elements come into play when calculating these all-important reorder levels. There are three main elements that you’ve got to keep an eye on:
- Lead Time: This is the number of days it takes for an order to arrive once you’ve placed it with your supplier.
- Demand: Also known as the rate at which your customers are snapping up your products. If you’ve got a hot cake on your hands, you’ll need to know how hot it is to calculate when to reorder it.
- Average Daily Usage Rate: This is the number of units flying off your virtual shelves each day. Sold 300 ergonomic mouse pads yesterday? Your daily usage rate for mouse pads is 300.
Traditional Formula for Calculating Reorder Levels
This formula is the classic, tried-and-true method to calculate reorder levels used by many e-commerce businesses and inventory management teams:
Reorder Point = (Daily Usage Rate) × (Lead Time)
Here’s a working example. Suppose you’re in the world of sock retail, selling 100 socks a day (that’s 50 pairs, for those keeping score). If your supplier needs 7 days to deliver new stock, you will calculate your reorder level like this:
100 × 7 = 700 socks
When sock inventory drops to 700, you should order more stock.
Safety Formula for Calculating Reorder Levels
For those who love to belt and brace, adding safety stock to your reorder level formula gives you that extra cushion. You can add a safety “cushion” to the traditional formula above, so it becomes:
Reorder Level = (Daily Usage Rate) × (Lead Time) + Safety Stock
In our working example, let’s say we want to give ourselves a safety net of one extra day’s worth of stock. The safety formula would look like this:
(100 × 7) + 100 = 800 socks
So when sock inventory drops to 800, you should order more stock, knowing you should have 100 socks left in when new stock arrives.
Probabilistic Formula for Calculating Reorder Levels
If your lead time and demand fluctuate, probabilistic models are your go-to. These involve some statistical acrobatics like standard deviation and z-scores, but they make your reorder levels far more resilient to change.
In our working example, let’s say your supplier has extended your lead times to 14 days, but when comparing year-on-year sales data, demand dropped by 50 units per day for the same period in the previous year. Your probabilistic formula would look like this:
New Reorder Level = (New Daily Usage Rate) × (New Lead Time)
You may also need to apply a probabilistic formula for seasonal demand. When demand rises, crank up those reorder levels. When it dips, wind it back down.
Assumptions and Limitations of Reorder Level Formulas
So, you think you’ve got a handle on how much of your product will sell each day? Really? Even on a rainy Tuesday when everyone’s mood is as damp as the weather? A formula often assumes that demand is constant, but we all know life isn’t that straightforward. Always consider seasonal swings and special events that could skew your average demand. Tailor your reorder point accordingly.
The formula assumes this is consistent. But let’s face it, suppliers are as unpredictable as British weather. Maintain a good relationship with your suppliers. The better you know them, the better you can predict any unexpected lead-time changes.
So, you’ve got your demand and lead time sorted, and you’re ready to make your move. But hang on a second. Timing can throw a spanner in the works. Orders don’t always arrive just when you’ve sold your last item.
Tip: Add a buffer or “safety stock” to guard against timing discrepancies. It’s your get-out-of-jail-free card for those “just in case” moments.
Implementing Reorder Levels in Your Inventory System
If you’re a fan of doing things the old-fashioned way, manual monitoring inventory involves spreadsheets. With this method, you:
- Regularly check your inventory numbers and stock level
- Plug them into your trusty formula
- Place orders accordingly
Keep in mind that manual methods are prone to human error. Ever tried counting sheep to fall asleep and lost track? Yep, it’s like that, but with your inventory.
For those of you who’d rather let tech do the heavy lifting, inventory management software can be a game-changer. With automated systems, you:
- Input your reorder formulas once
- Sit back as the software keeps tabs on your inventory
- Receive alerts when it’s time to reorder
Be aware that software solutions aren’t always perfect either. Technical glitches can occur, and there’s often a learning curve to get the hang of new systems. We recommend regular spot checks of your inventory to ensure you’re on top of this.
Integration with Other Inventory Metrics
Last but not least, remember that reorder levels are part of a bigger picture. Other metrics like Economic Order Quantity (EOQ) play a role, too. When you integrate these metrics, you’re cooking up a feast of efficient, cost-effective inventory management.
Why You Should Calculate Reorder Levels
Now you know what a reorder level is, you can calculate it in your sleep, and you’re probably itching to implement it. But hang on a tick—why should you even bother? What’s in it for you?
No More Inventory Level Nightmares
Once you’ve nailed down your reorder levels, those nightmares of empty shelves and angry customers will become a thing of the past. Accurate reorder levels act like a security guard for your inventory, ensuring you’ve got just enough stock to meet demand.
Tip: Schedule regular stock checks, ideally in sync with your inventory system updates, so you’re always in the know.
Consistent Cash Flow
Nobody likes money stuck in unsold stock. A precise reorder level means you only invest in product stock that you can shift quickly. If you sell hand-crafted ukuleles and know you’ll shift 20 a week, why order 50? Stick to what sells!
Adaptable Business Model
Accurate reorder levels make your business agile. If market conditions change, you can adapt quickly, changing your stock levels up or down as needed. This means you can keep an eye on market trends and adjust your reorder levels to ride the wave.
Better Customer Service
Who doesn’t love a bit of VIP treatment? Accurate reorder levels aren’t just for you; they’re a treat for your customers too. When your popular items are always in stock, you’ll avoid stock-outs and keep your products available when customers want them.
Tip: Use customer reviews and feedback to identify which items are your crowd-pleasers. Make sure your reorder levels for these are on point!
Reduced Storage Costs
The more precise your reorder levels, the less you need to keep hanging around in storage, gathering dust and costing you money. Why order 1,000 inflatable flamingos when your reorder level analysis shows you can sell only 200 a month? Reduce your storage footprint and, by extension, your storage costs.
Knowing Your Business Better
Calculating reorder levels forces you to get to grips with your sales trends, seasonal fluctuations, and customer preferences. It’s like having a telescope aimed directly at the core of your business. Think of it as your business’s yearly health check-up, but instead of stepping on a scale, you’re evaluating your inventory metrics.
Reorder Point Formula FAQs
All right, let’s do a quick recap. Reorder levels are essentially your inventory’s ‘low fuel’ warning. We discussed traditional methods to calculate them, ventured into more advanced techniques, and even touched on how to implement these in your inventory system. If you still have questions, here’s some quickfire FAQs to fill in the blanks!
What happens if I miscalculate the reorder level?
Don’t panic! If you’ve overestimated, you might just have a surplus of stock for a while. If you’ve underestimated, a quick pivot to a backup supplier might save the day. The key is to monitor and adjust.
How often should I update my reorder level calculations?
Life changes, and so does demand. We recommend a quarterly review, but if your business can fluctuate, you might need to do this more often. It’s like checking the tyre pressure on your car—you don’t want to wait till it’s flat.
Are there industry-specific considerations for reorder levels?
Absolutely. If you’re selling perishable goods like food, you’ll have a different set of challenges compared to someone selling, say, vintage furniture. Consider your industry quirks when setting reorder levels.
And there you have it, a comprehensive guide on how to calculate reorder levels. Feeling enlightened but still think you could use some specialist help? At Delta Fulfilment, we’re more than happy to lend our expertise. Accurate reorder level calculation is just one piece of the inventory puzzle and with our order fulfilment solutions, we take the weight off your shoulders and handle all of this for you. Why not schedule a call with us for a personalised consultation on how we can help your business?