How to Calculate Reorder Level? Definition, Advantages, and Easy 5-Step Calculations for the Reorder Point Formula in 2022
By being able to execute proper business calculations, eCommerce retailers can advance in their goals. In the eCommerce industry, knowing when and how many products you require to fulfill orders is crucial. One method to show your aptitude for forecasting inventory and assisting your business in maximizing profits is by performing these calculations precisely and efficiently. Timing and the amount of inventory ordered should be accurate. If you have all the data, you can automate the re-ordering process.
Today we will go into detail about the reorder level and how to calculate it using the reorder level formula, examples in different scenarios to maintain your inventory needs, and much more.
- What is a Reorder Level?
- Advantages of Reorder Level
- Reorder Level Formula: Calculation in 5 Simple Steps in 2022
- Determining a Fixed Reorder Level Stock
- The Reorder Level of Stock Calculation in Different Circumstances
- Modified Reorder Level Formula
- Conclusion: Choosing WareIQ for Faster and More Accurate Reorder Levels
- Reorder Level Formula FAQs
What is a Reorder Level?
Reorder level, also known as reorder point in management accounting, is the inventory level at which a business would place a new order or begin a new production run.
Reorder level is influenced by a company’s lead time for work orders, demand during that period, and whether or not it should keep a safety stock. The time it takes the company’s suppliers to manufacture and deliver the ordered units is known as the work-order lead time.
It is critical to determine the appropriate reorder level. A company may receive the ordered units faster than anticipated if it places a fresh order too soon and this could result in increased carrying expenses such as storage rent, opportunity costs, etc. Conversely, if an order is placed too late, the company would incur stock-out expenses, such as missed sales and customer dissatisfaction.
WareIQ, an eCommerce fulfillment company, empowers online brands with a superior-tech platform to compete with Amazon like service levels by bringing their average delivery timelines from 5-10 days to 1-2 days.
Advantages of Reorder Level
A conventional advantage of reorder level is to avoid stock shortage. Reorder levels are important since they enable a company to increase productivity and perhaps even revenues and profits. This is due to the fact that acquiring the right quantity of inventory can help the company run effectively while avoiding uncertainties like product waste.
Reorder levels that are precise also aid in lowering carrying costs and other costs related to storing inventory. Rent, insurance, and potential spoilage are some carrying expenses that can be avoided or decreased with prudent ordering levels. Reorder level calculations are another useful tool for ensuring uniformity among team members when several people are in charge of issuing orders. The stock requirements are automatically activated at the order point.
You may optimize your inventory list and reduce administrative time by using the reorder level model, which is a helpful decision-making tool. This reality enables you to concentrate on bringing value to your company while letting the system function on its own. Using this system has a number of benefits, including:
- Providing better service to both internal and external customers
- Preventing delays throughout the supply chain
- Lowering the inventory cost
- Maximizing the space in your inventory
- Staff members focus on value-added tasks while saving time
- Putting facts and evidence in front of speculation
- Forming a communication bridge between seller and manufacturer
- Avoiding overstocking
- Avoiding getting the items too early
- Preventing your capital from getting held up
- Making inbound and outbound logistics more efficient
Reorder Level Formula: Calculation in 5 Simple Steps in 2022
Reorder Level or Reorder Points can be calculated in 5 Easy Steps explained below;
Determine Your Average Demand
The very first step is determining the average demand for a product or material. This refers to how many units of a specific commodity you sell or utilize over a certain period of time. There could be several retail items you require each day, week, or month, such as dishes, shoes, laptops, etc. You might also need a specific quantity of manufacturing material over time.
Because demand may change from one period of time to the next, try estimating your inventory utilization over several of your chosen time periods and calculate the average of those results. This might be especially true for businesses or products that depend on outside factors.
Calculate Your Lead Time
The lead time is the period of time between when you place an order till the time you receive the shipment of goods. Use the same time unit (days, weeks, months, etc.) that you used to establish your average demand to calculate your lead time. You should calculate your lead time in days if your average daily demand is 100 goods. The wait time would be measured in weeks if your demand was 100 products per week.
If deliveries are regular, you can generally automatically establish your lead time by looking up your order and delivery history.
If delivery times are unpredictable, get the average lead times of a large number of orders. If outside circumstances affect how long it takes to get a delivery, use alternative lead times.
Decide if You Should Keep a Safety Stock
Determining whether you maintain a safety stock or not, depends on your preference. You will have to use a different formula for your reorder level for different situations. A business may retain some goods or materials on hand as safety stock in case certain circumstances arise, such as an unexpected spike in demand or a delivery problem. If you want to know if your inventory needs a safety buffer, compare the amount of stock you maintain on hand versus the amount you sell or use.
You can also work with a business executive to determine whether your organization has a policy of maintaining a safety stock on hand and whether you should factor this into your reorder level. Any adjustments you might make or recommend making to your inventory levels should be communicated clearly.
Use the Reorder Level Formula
Calculate reorder levels with the proper formula using your average demand, lead time, and safety stock.
The formula is as follows:
Reorder Level Formula = (Average Demand × Lead Time)
The formula in case safety stock is kept by the company:
Reorder level = [(Average Demand × Lead Time) + Safety Stock]
Your average demand and lead time should be calculated in the same unit of time. Your lead time should be calculated in days if your demand is calculated in units of products per day. Your lead time should also be measured in weeks if your demand is too. To ensure accuracy, think about working on your calculations simultaneously or asking a teammate to do so.
You can also read this detailed article on Reorder Quantity Formula.
Assess and Adjust as Required
Finally, review your reorder level calculations and make any necessary adjustments. You might need to adjust your reorder level to account for the increased demand if, for instance, you find you are running low on the item before your next purchase comes in. You might need to modify your reorder level if orders start showing up with time changes.
Determining a Fixed Reorder Level Stock
While determining a fixed Reorder Level Stock the following factors are involved:
Rate of Material Consumption
It is the amount of material or number of items you sell in a lead time period. The material and items are averaged as per the duration of the time frame taken.
Before you calculate the reorder level, you should keep a safety margin of stocks with you in case of higher demand than the average demand level.
Delivery Period or Lead Time
The average delivery period or average lead time is the time taken to get the stock after placing an order to your merchant or directly to the manufacturer.
Maintaining a Minimum Stock Level
Minimum stock level maintenance specifically helps small and medium-sized sellers and sellers who have limited storage space in different locations. This keeps your business supplied with stock and helps avoid uncertainty in inventory.
Storage Fees and Interest on Materials-Related Capital Investments
This is the crucial part to think about. You may calculate and order inventory as per your demand and your capacity to fulfill orders. This is not applicable if you have your own storage facilities but if you partner with a 3PL fulfillment company and use their fulfillment centers to store inventory, you will have to pay monthly subscription fees or for the amount of storage you are utilizing.
Having an Emergency Fund
Keep aside an excess amount of capital in liquid form to tackle uncertainties like machine breakdowns, supply-chain failures, increases in rates, etc. Many times, work is on hold in the logistics chain because of payment dues for certain processes. Read how should you plan your logistics in eCommerce.
The Reorder Level of Stock Calculation in Different Circumstances
Case 1 – Without Safety Stock
Mr. Sanjay’s bookstore sells 200 books on average in a week. The maximum demand in a week is 217 laptops. If the lead time is 3 weeks then the reorder level calculation using the reorder level formula would be:
Reorder level = Maximum usage(weekly) × Lead time (in weeks)
= 217 units × 3 weeks
= 651 units
It means that every time the number of books decreases to 651, Mr. Sanjay’s bookstore must place a new order.
Case 2 – With Safety Stock
Suppose you are a bike seller with the following figures:
Minimum Demand: 40 bikes per month
Average Demand: 50 bikes per month
Maximum Demand: 60 bikes per month
Safety Stock: 15 bikes
Minimum Lead Time: 1 month
Average Lead Time: 1.25 months
Maximum Lead Time: 1.5 months
The reorder level of your outlet using the reorder point formula would be:
Reorder Level = (Maximum Demand × Maximum Lead Time) + Safety Stock
= (60 units × 1.5 weeks) + 15 units
= 90 units + 15 units
= 105 units
Note: Both demand and lead time must be expressed in the same time unit, i.e., in days, weeks, etc.
Modified Reorder Level Formula
The amount of reordering presumes a constant pace of inventory consumption, which is usually false. For instance, if usage levels fluctuate often, the reorder level will be too low, resulting in a lack of inventory when it is required for production.
On the other hand, this reorder procedure will result in having too much inventory on hand if actual usage decreases. It might be helpful to account for extra stock on hand and replace the average daily usage rate with the maximum daily usage rate in the reorder point formula in order to prevent stock-out situations.
The revised reorder level formula is as follows:
| [(Maximum Daily Usage Rate x Lead Time) + Safety Stock] |
Conclusion: Choosing WareIQ for Faster and More Accurate Reorder Levels
After understanding the importance of reorder level, it is understood that establishing reorder points is beneficial so that you can reduce your capital investments and make sure that your company is running as efficiently as possible in terms of both inbound and outbound logistics.
The requirement for accurate data for supply chain planning and presenting a precise picture of customer demand is the most crucial and occasionally, most difficult aspect of effectively calculating reorder levels. You could wind up with too much or too little stock if the data is incorrect and the calculation is wrong.
WareIQ can help eCommerce firms to manage inventory, anticipate demand, pack orders, cut shipping costs, and meet consumer expectations. In case you seek to store inventory in multiple WareIQ fulfillment centers, we will automate your reordering levels, optimize your data and reshuffle your inventory to relevant warehouses that are close to high-demand locations and transport hubs.
WareIQ assists brands in enhancing their shipping strategies with a network of fulfillment centers spread out across the country and technology that is integrated with the top eCommerce platforms.