What Is Reorder Point And How Is It Calculated

What Is Reorder Point And How Is It Calculated

And you, have you ever heard of the reorder point? This is a key indicator in the logistics management of any company dedicated to serving products since it prevents warehouses from running out of stock and thus guarantees service and replacement on time. This is why correctly calculating the reorder point is essential.

What Is A Reordered Point Importance

The order point or reorder point (ROP) is an indicator that marks when a company must buy more stock of a particular product to avoid a stock outage. This allows you to continue serving commonly and meet demand until a new shipment of that product arrives.

Reorder Point Importance

Oversupply problems? Expired products in stock before distribution? Losses caused by poor management of the supply function? The reorder point formula is the answer to all these problems, which, by the way, are pretty frequent. Failures in planning, errors in placing orders, and lack of space in the warehouse due to the accumulation of unnecessary products are the consequences of decision-making that is not based on objective data. Additionally, the reorder point helps to combat possible errors in planning and errors made when placing orders and solves the lack of space in warehouses. 

The breakpoint can be scheduled periodically or reviewed continuously; this depends on the company itself and the products you work with. In short, this formula is used to anticipate the needs of the products and contrast them with the quantities available. In this way, it is possible to ensure that you always have the correct amount of product to meet the demand. This is an essential calculation for any warehouse, ensuring balance and consistency. Until a few years ago, an operation that had to be carried out by hand, or based on the data collected in Excel sheets, today it could be automated to gain convenience and minimize the risk of errors that could affect supply.

The main advantages of knowing the reorder point are:

  • Have a product in sufficient quantity to supply the demand.
  • Reduce overhead by avoiding investing in surplus stock.

How Is Reorder Point Calculated

As we have already discussed, the order point helps determine a point where you have enough inventory to meet demand while waiting for the next shipment to arrive. To calculate it accurately, it is essential to have specific data to be able to carry out the formula:

On the one hand, the stock levels necessary to avoid breakage are directly related to the level of service that the company accepts, that is, with the orders that the company is capable of attending in a given period.
Second is the lead time or supply time of suppliers, that is, the time it takes for a supplier to manage the orders and ship the merchandise or produce and ship the merchandise.
Finally, the expected consumption of that product in a certain period (generally in days).

Once we have these data, we can calculate the reorder point. The formula to do this is as follows: safety stock + (average consumption x lead time).

For example, imagine that a company that operates from Monday to Friday has a daily demand for 700 units of its product, a lead time of 5 days, and safety stock of 100 units. The company will have to buy more stock when warehouse stocks reach 3,600. This way, they will be able to cover the demand until new merchandise arrives. Finally, it should be noted that the data on stock levels necessary to avoid breakage, lead time, and everyday consumption are projections. They may not be exact, so companies must have extra stock of products for emergencies ( safety stock).

Finally, remember that to be competitive, you have to offer a constant level of product and service to customers. You have to strike a balance between excess stocks and shortages. The reorder point calculation helps to achieve this. However, it must be taken into account that, as with the variables on which it depends, it can change over time, so it is recommended to update it frequently.

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