REORDER POINT: HOW TO CALCULATE IT IN INVENTORIES AND EXAMPLES - DUDAS - 2025

The reorder point is the minimum quantity in stock for an item, so when stock reaches that quantity, the item must be reordered. This term refers to the level of inventory that triggers an action to replenish that particular inventory.

If the purchasing process and supplier fulfillment on its delivery are working as planned, the reorder point should result in the replenishment of inventory arriving just as the last available inventory runs out. Thus, production and sales activities are not interrupted, while minimizing the total amount of available inventory.

You must reorder before inventory is depleted, but ordering too early will cost more to store these items in excess. If the order is placed too late, the insufficiency will generate dissatisfied customers who will look for that product in the competition.

Setting the reorder point helps reduce inventory costs, as well as ensuring that there is always enough stock for customers, even when things change unexpectedly.

How to calculate the reorder point in inventories?

The two factors that determine the reorder point are:

- The demand during the delivery time, which is the inventory required during the delivery time.

- Safety stock, which is the minimum level of inventory to be kept as protection against possible shortages due to fluctuations in demand or delivery time.

It is calculated as follows:

Reorder point = Demand during delivery time + safety stock.

Demand during delivery time

You need to know the demand for the item during the delivery time, because that is how long you will have to wait before new stocks arrive.

The replacement does not come immediately. Even if the supplier has the items available in stock, it will take time to pack the order and even longer to ship. This waiting time is what is known as the delivery time. We have:

Demand during delivery time = average daily demand x delivery time in days.

Average daily demand is calculated by taking the total demand in a given period (monthly, yearly, etc.), dividing it by the number of days that period has.

The following image shows the inventory model with reorder point:

The reorder point may be different for each inventory item, as items may have different demand and may require different delivery times to receive their replenishment from the supplier.

Stock

The formula for the reorder point is based on averages; therefore, demand at any given time may be above or below its average level.

The supplier can also deliver before or after the scheduled days, and some inventory may remain available when the replacement order arrives, or a shortage condition may arise that prevents it from being produced or sold.

The determination of the safety stock involves evaluating between the risk of shortages -which implies a dissatisfied customer and the loss of sales- and the increase in costs associated with having an additional inventory.

The safety stock is calculated taking into consideration the quantity of the article necessary to cover a variation in demand and a supplier risk. The safety stock can also be calculated with the mathematical formula:

- Average daily demand D _m

- Standard deviation of delivery time σ _D

- Average delivery time D

- Standard deviation of demand σ _Dm

- Safety factor u (from 0 to 4)

Examples

First example

A company sells an average of 100 staplers per month. Every month you order from your supplier. The supplier's delivery time in the last 6 months has varied from month to month as follows:

To calculate average daily demand, the units of staplers sold during a month are divided by 30 days.

100/30 = 3.33 average daily sales.

To get the average delivery time, the delivery times are first added together.

(8 + 11 + 9 + 6 + 7 + 5) = 46 days.

This result is divided by the number of orders placed, which is 6 because the orders were placed monthly.

46/6 = 7.67 average delivery time.

Taking the averages of daily sale and delivery time, the safety stock is calculated. For our purpose, the safety stock is 20 staplers. Therefore, for this example the reorder point would be:

(3.33 x 7.67) +20 = 45.54

When inventory is reduced to 46 staplers, a restock order must be placed.

Second example

Timewear in the United States sells watches made in China. The supplier always has his warehouse full of watches ready to be shipped at any time.

It takes the supplier a couple of days to collect and pack the watches. After that, the watches travel five days in a truck to the port.

The boat trip from China to the US takes about 30 days. When the watches arrive, they spend a week in customs and then three days traveling to the Timewear warehouse.

Calculating delivery time is easy; you just have to add all the times:

2 + 5 + 30 + 7 + 3 = 47 days of delivery

Since it takes Timewear 47 days to get a new shipment of watches, you will need to have enough stock on hand to cover these 47 days of delivery.

You need to know the demand during this period. Timewear sells an average of 300 watches per month (300/30 = 10), so they would sell approximately 10 watches per day.

Therefore, the demand for Timewear at delivery time is 47 × 10 = 470. This means that Timewear will need 470 watches until its next shipment arrives, if nothing unexpected happens.

Calculation of

Sometimes unexpected things happen. There may be a sudden spike in demand and the product sell out quickly, or perhaps the supplier experienced a problem and it will take an extra week for their lead time. This can be reviewed in the company's sales and purchase order history:

Timewear on a typical day sells 10 watches, but on weekends they can sell up to 15.

Their typical delivery time is 47 days, but during typhoon season it can be as long as 54 days.

(15 × 54) - (10 × 47) = 340

This means that Timewear needs to have an additional 340 units of safety stock to guard against the unexpected. The reorder point would be:

470 (delivery time demand) + 340 (safety stock) = 810

When its stock reaches 810 watches, Timewear must place a new order with its supplier.

References

1. Wikipedia, the free encyclopedia (2018). Reorder point. Taken from: en.wikipedia.org.
2. Tradegecko (2018). Reorder Point (ROP) Calculator - Know When to Reorder. Taken from: tradegecko.com.
3. Steven Bragg (2017). Reorder point. AccountingTools. Taken from: accountingtools.com.
4. Dear Systems (2017). Reorder Point Formula: This Is What You Need to Avoid Stockouts. Taken from: dearsystems.com.
5. Lean Lab (2013). 10 Exercises on Reorder Point. Taken from: leanmanufacturingpdf.com.
6. Wikipedia, the free encyclopedia (2018). Safety stocks. Taken from: es.wikipedia.org.