Introduction to Reorder Points

Reorder points are a pivotal element in effective inventory management. They signal the optimal time to replenish stock, ensuring you avoid the pitfalls of running out of products or holding too much inventory. For ecommerce businesses, mastering reorder points can lead to significant cost savings, improved customer satisfaction, and streamlined operations.

In the fast-paced world of ecommerce, where customer expectations are high, and competition is fierce, not having the right inventory at the right time can be disastrous. Stockouts can lead to missed sales opportunities, while excess inventory ties up valuable capital and increases storage costs. This guide will provide you with a deep understanding of reorder points and how to implement them effectively to maintain a perfect balance in your inventory management.

What is a Reorder Point?

A reorder point is the inventory level at which you need to place a new order to replenish stock before it runs out. It is a critical trigger that ensures you have enough inventory to meet customer demand without overstocking. The calculation of reorder points involves two main components: lead time demand and safety stock.

Lead Time Demand: This is the amount of inventory you expect to sell during the lead time, which is the period between placing an order and receiving the inventory.

Safety Stock: This is the extra inventory you keep on hand to cover unexpected increases in demand or delays in supply.

Why Reorder Points are Crucial for Ecommerce Businesses

Reorder points are not just about maintaining stock levels; they are about optimizing your entire inventory management process. Here’s why they are crucial:

• Preventing Stockouts and Lost Sales: Stockouts can lead to lost sales and dissatisfied customers. By setting accurate reorder points, you ensure that you always have enough inventory to meet demand.
• Reducing Excess Inventory and Storage Costs: Overstocking ties up capital and increases storage costs. Reorder points help maintain optimal inventory levels, reducing excess stock.
• Enhancing Customer Satisfaction: Consistently meeting customer demand leads to higher satisfaction and repeat business. Reorder points help you achieve this by ensuring you never run out of stock.

How to Calculate Reorder Points

Calculating reorder points involves a few key steps. Here’s a detailed, step-by-step guide:

Step 1: Gather Historical Data
Analyze your past sales data to determine average daily sales. This historical data is essential for estimating demand during the lead time.

Step 2: Determine Lead Time
Lead time is the time it takes from placing an order until it’s received and ready for sale. Knowing this period accurately is crucial to avoid stockouts.

Step 3: Calculate Lead Time Demand
Multiply your average daily sales by the lead time to get the lead time demand. For example, if your daily sales average 10 units and your lead time is 5 days, your lead time demand is 50 units.

Step 4: Establish Safety Stock Levels
Safety stock acts as a buffer against uncertainties. Calculate it based on factors like demand variability and lead time fluctuations. A common approach is to use a standard deviation of your lead time demand.

Step 5: Calculate Your Reorder Point
Add the lead time demand and safety stock to get your reorder point. Using the previous example, if you determine you need 20 units as safety stock, your reorder point would be 70 units (50 units lead time demand + 20 units safety stock).

Common Mistakes in Setting Reorder Points

Even with a solid understanding of reorder points, businesses can make mistakes that lead to inefficiencies. Here are some common pitfalls and how to avoid them:

• Ignoring Demand Variability: Not accounting for fluctuations in demand can lead to stockouts. Regularly review and adjust your reorder points based on changing demand patterns.
• Inaccurate Lead Time Estimates: Underestimating lead time can result in ordering too late. Ensure your lead time calculations are accurate and consider any potential delays in the supply chain.
• Not Updating Reorder Points Regularly: As your business grows and market conditions change, your reorder points should be reviewed and updated regularly to reflect current realities.

Basic Reorder Point Calculation

Calculating reorder points involves a few key steps. Here’s a detailed, step-by-step guide:

Step 1: Gather Historical Data
Analyze your past sales data to determine average daily sales. This historical data is essential for estimating demand during the lead time.

Step 2: Determine Lead Time
Lead time is the time it takes from placing an order until it’s received and ready for sale. Knowing this period accurately is crucial to avoid stockouts.

Step 3: Calculate Lead Time Demand
Multiply your average daily sales by the lead time to get the lead time demand. For example, if your daily sales average 10 units and your lead time is 5 days, your lead time demand is 50 units.

Step 4: Establish Safety Stock Levels
Safety stock acts as a buffer against uncertainties. Calculate it based on factors like demand variability and lead time fluctuations. A common approach is to use a standard deviation of your lead time demand.

Step 5: Calculate Your Reorder Point
Add the lead time demand and safety stock to get your reorder point. Using the previous example, if you determine you need 20 units as safety stock, your reorder point would be 70 units (50 units lead time demand + 20 units safety stock).

**Example:** Imagine you are an ecommerce seller with a product that has an average daily sales rate of 10 units and a lead time of 5 days. Your lead time demand would be:

Lead Time Demand = Average Daily Sales x Lead Time
Lead Time Demand = 10 units/day x 5 days = 50 units

If you decide to keep 20 units as safety stock, your reorder point would be:

Reorder Point = Lead Time Demand + Safety Stock
Reorder Point = 50 units + 20 units = 70 units

This means you should reorder when your inventory level drops to 70 units.

Advanced Reorder Point Calculation

The "Advanced Reorder Poin" (my term for it), is all about the "Service Level" that the seller want to assign to a particular product. Service level in inventory management refers to the probability of not facing a stockout during a replenishment cycle. It is expressed as a percentage and indicates the desired level of inventory availability to meet customer demand. For example, a 95% service level means there is a 95% chance that inventory will be sufficient to fulfill customer orders without running out of stock. This metric helps businesses balance the costs of holding inventory against the risks of stockouts, aiming to maintain customer satisfaction and optimal inventory levels.

To further refine your reorder point calculation, consider incorporating a service level modifier to account for the desired level of customer service. A common service level is 95%, meaning you aim to have enough stock 95% of the time.

**Step 1: Calculate the Standard Deviation of Lead Time Demand**
First, calculate the variability in lead time demand. This involves determining the standard deviation of your lead time demand. Assume the standard deviation is 5 units.

**Step 2: Determine the Z-Score for Desired Service Level**
For a 95% service level, the Z-score is approximately 1.65.

**Step 3: Calculate Safety Stock with Service Level Modifier**
Safety Stock = Z-score x Standard Deviation of Lead Time Demand
Safety Stock = 1.65 x 5 units = 8.25 units (round to 9 units)

**Step 4: Recalculate the Reorder Point**
Reorder Point = Lead Time Demand + Safety Stock
Reorder Point = 50 units + 9 units = 59 units

**Example:** Using the same product with an average daily sales rate of 10 units, a lead time of 5 days, and a standard deviation of 5 units, and aiming for a 95% service level:

Safety Stock = 1.65 x 5 units = 8.25 units (round to 9 units)
Reorder Point = 50 units + 9 units = 59 units

This means you should reorder when your inventory level drops to 59 units to maintain a 95% service level.

Real-World Examples of Successful Reorder Point Implementation

Understanding reorder points conceptually is one thing, but seeing them in action can be even more enlightening. Here are a couple of real-world examples:

Case Study: Online Retailer A
An online retailer specializing in home goods struggled with frequent stockouts, leading to lost sales and frustrated customers. By implementing accurate reorder points AND an effective alert system, they reduced stockouts by 30% and saw a significant increase in customer satisfaction and repeat business.

Case Study: Ecommerce Business B
A fashion ecommerce business faced challenges with excess inventory and high storage costs. After calculating and adjusting their reorder points, they were able to reduce excess inventory by 25%, freeing up capital and reducing storage costs significantly.

Advanced Tips for Optimizing Reorder Points

For those looking to take their inventory management to the next level, here are some advanced tips:

• Integrating Reorder Points with Inventory Management Software: Use sophisticated inventory management software to automate reorder point calculations and notifications. This reduces manual errors and ensures timely reordering.
• Using Predictive Analytics for Better Forecasting: Leverage predictive analytics to forecast demand more accurately. This involves analyzing past sales data, market trends, and other relevant factors to predict future demand.
• Regularly Reviewing and Adjusting Reorder Points: Reorder points are not set-and-forget. Regularly review and adjust them based on changing demand patterns, lead times, and other factors to ensure they remain accurate and effective.

Next Steps

Understanding and implementing reorder points is crucial for efficient inventory management. By following the steps outlined in this guide, you can ensure your business is well-prepared to meet customer demand while minimizing excess inventory. And, if you use the Inventory Boss, you will receive weekly alerts about all your products and how close they are getting to their reorder point.

Ready to take your inventory management to the next level? Get the Inventory Boss Today!. Check out our full guide at Inventory Boss 8 Steps and watch our detailed videos on YouTube. See links below:

Internal and External Links

• Internal Links:
  • Inventory Boss Blog
  • Inventory Boss 8 Steps
• External Links:
  • YouTube Video on Inventory Forecasting