Leveraging Reorder Points to Maintain Stock Levels

Best Practices: Leveraging Reorder Points to Maintain Stock Levels

It doesn’t matter if you’re a small start up eCommerce business or a multi-warehouse giant, leveraging reorder points to maintain stock levels will have a positive effect on your day to day operations and help ensure that you capture every sale you can.

Reorder Point Low Inventory

Even before my previous eCommerce business was mature enough to justify an inventory management software solution, I still relied on reorder points in spreadsheets to help me maintain stock levels.  Believe me when I say, every seller can benefit by using some sort of a reorder point to evaluate stock levels.

 

Sales Velocity

The most basic way to figure out a reorder point is to just look at your order history on any given product.  If you sell 30 items in 30 days, and your ideal stock level is 30 days, then you should stock 30 of that product.  This is referred to as your Sales Velocity.  Figuring out how much inventory you move in a given time is a great way to decide how much to order on your next purchase.

It’s more of a business decision to determine what sort of back stock you want to keep.  Some companies prefer shorter shelf life and more frequent replenishment orders, so 14 days would be more desirable.  Other companies might order overseas or have a long replenishment cycle, so for those companies, a much larger back stock would be ideal.  Here is the basic formula to calculate your sales velocity.

Reorder Point Sales Velocity

 

Reorder Points

Of course, Sales Velocity might not be right for everyone.  Another common method of leveraging reorder points would be to set thresholds.  Using Sales Velocity is just one way of figuring out what your threshold should be.  Other common ways may be to set reorder points based on anticipated volume, purchase discount levels, and any other number of ways that work best for your company.

Reorder Point Stock Room

No matter how you feel is the best way to calculate your reorder points, they can all be leveraged to the same effect.

Let’s say you never want to dip below 100 units on hand at any given time because it may take 2 months to receive more and you don’t want to risk selling out.  That would be your reorder point.  When you get below 100, you order more.  This may be the most basic way to set reorder points to help maintain your stock levels.

 

Maximum Reorder Points

Maximum Reorder Points, upper thresholds, desired stock levels, or any other number of names, are particularly useful when using reorder points.

Setting the reorder point, or threshold at which you need to place an order is only half of the battle.  It is ideal to also set up a point to which you should reorder TO.  For example, you may have an ideal stock level of 100, but don’t want to place an order for 1 if you dip to 99.  You may, instead, want to reorder 75 once your stock level reaches 25.  This would be a perfect example of reorder points being fully maximized.  The reorder point is 25, but your reorder maximum would be 100.

Many software providers can do this for you, but it can also be done on a spreadsheet.  You would just need to do a conditional statement.

Reorder Point Formula

 

Summary

In short, if you aren’t using reorder points to some degree, you should.  Maintaining stock levels to cover future sales is extremely important for businesses to capitalize an items full sales potential.

Always remember: a healthy business has a healthy stock level.