You can find a more detailed guide (with examples) for using the Reorder Point formula here.
Reorder Points are used to protect a 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 a Reorder Point.
In general, when choosing an appropriate level for Reorder Points, you need to think about the following aspects:
Estimated future demand for a product
Delivery times you want to provide customers. You should try to keep your inventory levels at the minimum possible to better ensure delivery times.
The Reorder Point level for materials depends on the products you manufacture. Keep enough material stocked to ensure a smooth production process with no delays related to unavailable stock.
Purchasing and manufacturing lead times, as well as possible fluctuations from averages
Cash flow capabilities. Excess inventory comes at a cost and means that you have money tied up in your warehouse.
Tip: In Make-to-Order situations, the Reorder Point should be kept at zero for products because you are not trying to keep products in stock. However, we recommend using Reorder Points for materials to satisfy manufacturing needs even when 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)