Calculate the Reorder Point for Accurate Replenishment

by Craig Anthony

0 min read

A reorder point is the unit level of a small business’ inventory that triggers the purchase of a predetermined amount of inventory to replenish stock. When properly calculated and utilized, ordering inventory at the reorder point leads to no interruption in production or fulfillment activities while at the same time reducing the amount of total inventory in stock. It is calculated as: Reorder Point = (Average Daily Sales x Lead time) + Safety Stock Assuming, Safety Stock = (Max Daily Sales – Average Daily Sales) x Lead TimeLead time is the time it takes to get the product from the vendor. Assume a business records the following data: average daily sales is $10,000 and lead time is four days. The maximum daily sales is $25,000. The reorder point is calculated as:Safety Stock = ($25,000 – $10,000) x 4 = $60,000. Reorder Point = ($10,000 x 4) + $60,000 = $40,000 + $60,000 = $100,000. The addition of the safety stock is important. Safety stock is the excess inventory that serves as a buffer between forecasted and actual sales. It is maintained in inventory solely to ensure a company has enough units on hand to meet unexpected customer demand.

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