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The point of reorder (ROP) is the inventory level that indicates when to place a new order to avoid running out of stock. It is also known as a point of order or point of replenishment.
In this step-by-step guide, we are going to analyze? How to calculate a reorder point? What is the formula for calculating ROP? with real examples that we have seen in Datup so you can calculate it in minutes with your company data.
If your company bills more than USD10 million a year, instead of calculating the reorder point manually, you can do it with a integrated platform that helps you calculate the reorder point and manage: demand, purchases and inventory in one place.
Now, let's see what it is and how to calculate the reorder point.
The point of reorder (ROP) is the amount of inventory they should be in so they can order more product before they run out of stock while waiting for the new order to arrive.
If the reorder point of my product A is 180, this means that when my inventory is 180 units, that's when I need to place another order to avoid being out of stock, while the new product arrives.
Therefore, the reorder point must be calculated for each product in your portfolio, because different products behave differently.
The reorder point (ROP) formula is as follows:
Reorder point = (average sales per day x Lead time in days) + Safety stock
This formula allows you to calculate the minimum value you need to have to avoid running out of stock and losing sales due to lack of product.
However, there are factors that you don't control and that affect your reorder point, such as: demand and leadtimes or supplier delivery times.
Therefore, we recommend that you use a demand and inventory planning software that can calculate these values for you automatically taking into account all the historical values of the variables you don't control and external factors that affect demand such as holidays, weather and inflation.
We have already seen what the reorder point is and what the formula is. But every element of the formula such as average sales per day or lead times (delivery times) and safety stock, so let's look at each one.
The first thing we need is to know how many units of product you sell on average per day.
To calculate the average daily sales and review how many units were sold over a period, such as a 30-day month. Then, divide this total number of units sold by the number of days in the period to get the average daily sales.
Average sales calculation = Total product sales/ Number of days
Average sales calculation: 800 units sold/30 days = 26.6 which we rounded up to 27
In this case, we sell 27 units of product per day.
The lead time or delivery time is the number of days that pass from an order to a supplier until the product is delivered to you. This may vary by supplier, so it's important that you take the real historical value and not the traded one for greater accuracy.
To calculate lead time, take the average time of several time periods for greater accuracy.
Lead time = Average (days from when the order is placed until the product is delivered)
Lead Time Calculation: Average (15 + 16 + 20)/3 = 17 days
In this case our average lead time is 17 because we take the average lead times of the last 3 orders.
Safety stock is the 'extra' inventory you have in case there is a variation in demand or in the supply chain process itself.
Safety Stock = (Maximum Daily Orders x Maximum Lead Time Value) — (Average of Average Orders x Average Lead Time)
Safety stock = (35 x 20) — (27 x 17) = 700 — 459 = 241 units
This is interpreted as meaning that we must have 241 units of reserve product inventory, in case there is a variation in demand or production.
Now with the previously calculated values for calculating average sales per day, lead time and safety stock, we can apply the order or reorder calculation formula.
Reorder point = (average sales per day x Lead time in days) + Safety stock
Reorder point = (27 x 17) + 241 = 700 product units
This means that when I have 700 units of inventory, that's when I must place the replacement order to guarantee that I will have the product available.
Remember that you should always use the same time units, in this case we calculate daily demand and delivery times in days.
Yes, there are several tools that allow this to be done. The important thing to consider is to have a tool that allows you to have full visibility: demand forecasting, inventory management and portfolio classification as Datup.
Because if you have all the information broken down into different tools and reports, you're not going to save time, or allow the team to work in one direction.
Companies such as Juan Valdez and Dersa Calculate reorder points dynamically, taking into account all the variables involved, with updated data and without the need to manually join them into spreadsheets.
They can achieve this thanks to the fact that Datup automatically integrates with all their data sources such as their ERP and WMS to bring this information in an integrated way.
This allows them to reduce errors, save time and make this process more efficient.
If you don't calculate the reorder point per product correctly, you run the risk of:
Therefore, keeping the calculation of the reorder point up to date allows you to:
There are three key moments you should monitor to update your reorder points:
You should check the reorder point on products where you have excess inventory or out of stock products because this could indicate that you are underestimating or overestimating some of the variables (demand, leadtimes and safety stock).
At Datup, we calculate the standard deviation and forecasting accuracy of demand and other important indicators such as the reorder point, which are automatically adjusted with artificial intelligence.
If there is variation in demand due to changes in seasonality, market trends, social, political factors or promotional campaigns, it is necessary to adjust the reorder point to reflect the new expected demand.
Delivery times may decrease, which is good, due to improvements in supply chain efficiency, change of suppliers, etc.
But it can increase due to logistical problems, social factors such as holidays or strikes or climate changes.
The main difference between the safety stock and the point of reorder is that safety stocks protect against unexpected fluctuations, while the point of order ensures a constant flow of products by issuing orders at strategic times.
Some teams calculate the reorder point without safety stock and only using expected demand and supplier times, although this is very risky because demand may vary and the supplier may have problems or fail.
In our experience, we have seen that the main limitation has to do with the fact that you are assuming scenarios with little uncertainty calculated manually in a spreadsheet.
This is fine if you're a small company, but if you have to handle hundreds of products and place hundreds or thousands of orders monthly and you've exceeded the $800,000 monthly threshold, you'd better have a integrated software for planning demand and inventories.
If you're going to calculate it manually, it's best to have an excel that feeds on the most up-to-date data on your business and allows you to have the best possible accuracy.
In short, you can calculate the reorder point by doing the following:
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