Determining the appropriate level of Reorder Point
This article gives quick recommendations for determining the appropriate level of Reorder Point. You can find a more detailed guidance (with examples) for using the Reorder Point formula here.
Reorder Point is used to protect the business against spikes in demand or shortages in supply. These could be caused by supplier failures, missing the manufacturing targets, seasonality, or unexpected large orders, for example. Read more about What is Reorder Point?.
In general, when deciding on the appropriate level of Reorder Point for a product or material, you need to think about the following aspects:
- Estimated future demand for a product.
- Delivery times you wish to provide to your customers. You should aim to keep your inventory levels at the minimum possible level to ensure desired delivery times for your clients.
- The Reorder Point level for materials is dependent on the products you manufacture. Keep enough material stock to ensure smooth production process with no delays related to unavailable stock.
- Purchasing and manufacturing lead times, and possible fluctuations from averages.
- Your cash flow capabilities. Excess inventory comes at cost and means that you have money tied up in your warehouse.
Tip: In a Make to Order situation, the Reorder Point should be kept at zero for products because you are not looking to keep any products in stock. However, we recommend using Reorder Points for materials to satisfy manufacturing needs even when they are using a Make to Order approach for products.
How to calculate Reorder Point?
This formula applies to both materials and products:
Reorder Point = (Average Daily Usage x Average Lead Time Days) + Safety Stock
Safety Stock = (Maximum Daily Usage x Maximum Lead Time Days) - (Average Daily Usage x Average Lead Time Days)