Leveraging Reorder Points to Maintain Stock Levels
Without some statistical analysis, knowing when to reorder stock can feel like a guessing game. While you can't predict the future, Finale Inventory is the next best thing. Our intuitive stock management software uses a sophisticated reorder point formula based on the inventory replenishment rules you set. Our dynamic reorder point formulas calculate several key data points. You'll understand how fast each product is selling, exactly when you need to reorder and the maximum quantity to keep in stock. You can configure your dynamic reorder point calculation to account for many factors, such as:
- Expected yearly growth.
- Vendor lead times.
- Internal processing time.
- Number of days you hold inventory.
- Number of days of buffer stock.
- Quantity multipliers for reordering, such as cases of 10 units.
In Finale Inventory, you can track all your inventory in real time. So, when your inventory levels get low, Finale Inventory alerts you with an email. You can set whether you want a reorder report summary or separate notifications for every low-stock alert. At any time, you can view the useful "days until stockout" metric for any product in your warehouse.
When you're ready to reorder, we have even more useful features to make replenishment as straightforward as possible. Using our purchase order management system, Finale Inventory can auto-populate your purchase orders with vendor information and order quantities based on your calculated maximum stock level. You'll always have the opportunity to tweak and approve your purchase order before sending it out.
Want to learn how to calculate your dynamic reorder point in Finale Inventory? See how we compute your reorder point for the most accurate restock forecasting. Or, check out all of the useful features available in our purchasing and inventory replenishment system.
What Is a Reorder Point, and How Can Leveraging This Formula Help You Maintain Stock Levels?
What is a reorder level? The concept goes by many names, including reorder point, reorder level and even order point. It is sometimes known as an ROP calculation. The definition for order point describes it as the smallest quantity of product you should have in stock when it's time to reorder. In general, you'll want to have enough stock left to last until your vendor can fulfill your request. You'll also want to give yourself enough safety stock to account for any delays or a sudden uptick in sales.
For most businesses, a reorder level is a moving target. It will depend on how fast the product moves, which may be in flux. In other words, this way of arriving at a reorder point uses sales velocity. It will also account for numbers like supplier lead times and the amount of buffer stock needed. The order point calculation may also factor in how often the company wants to restock, which may shift or stay constant.
The other avenue you can take when deciding how to calculate a reorder point for your inventory is to use static minimum and maximum thresholds. In this case, your desired level of safety stock is the low-end threshold. The amount of stock you're able to sell between restocks plus your minimum threshold is your high-end threshold. Using this reorder point formula, Finale Inventory can notify you whenever your inventory dips below your minimum reorder level. It will then populate your purchase order with the quantity required to reach your indicated maximum stock level.
Whether to use sales velocity or static order points depends on the industry you're in and your supply chain. If your supplier is overseas or offers deep volume discounts, you may want to reorder large amounts less often to avoid stockouts. If you have tight warehouse space and an irregular sales pattern, you probably want to order small quantities more frequently to avoid overstocking.
Best Practices: Leveraging Reorder Points to Maintain Stock Levels
It doesn't matter if you're a small startup e-commerce business or a multi-warehouse giant. Leveraging reorder points to maintain stock levels will positively affect your day-to-day operations and help ensure that you capture every sale you can.
Even before your e-commerce business is mature enough to justify an inventory management software solution, you'll simplify inventory management using reorder points in spreadsheets to help you maintain stock levels. Every seller can benefit by using some sort of a reorder point to evaluate stock levels.
Here are two best practices to keep in mind when using your reorder point formula for inventory management:
Keep a Lean Inventory
Many inventory managers choose to save on warehouse space by ordering smaller quantities more often. For a company with a fast-moving inventory, that could mean moving stock to the picking locations as soon as it arrives in the receiving dock. It helps to have a barcode inventory management solution that can speed up the receiving process.
In Finale Inventory, you can adjust your reorder point formula to specify the desired days of inventory for each product.
Many businesses create purchase orders manually. As your inventory expands, you may be ordering new product every day as different SKUs get low. Filling out purchase orders in your accounting program will quickly become inefficient. An inventory management program that calculates your reorder point for you will also automate other aspects of the process.
When you hit your reorder point, your replenishment process can begin automatically. Your low-stock alerts can quickly translate into a pre-populated purchase order, addressed to the appropriate vendor. It will generate the quantity based on your automated reorder point calculation. All you have to do is send it out. Plus, once the purchase order is underway, your inventory software will automatically add the incoming order to your available stock.
Understanding Sales Velocity
The most basic way to figure out an inventory reorder point is to 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, you should stock 30 of that product. This type of reorder level 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 with your next purchase. The basic formula to calculate your sales velocity is the number of units sold divided by the time frame for those sales.
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. A much larger buffer stock would be ideal for those companies.
Your reorder point kicks in when stock levels dip into the safety stock. You'll determine the amount to replenish by looking at your current sales velocity.
Reorder Points to Maintain Stock Levels
Sales velocity might not be right for everyone. Another standard method of leveraging reorder points would be to set minimum quantities. 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, safety stock or purchase discount levels. Set your minimum reorder point based on any way that works best for your company.
Let's say you never want to dip below 100 units on hand at any given time because it may take two 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.
Often, your minimum threshold is equivalent to the amount of safety stock you need. If you'd rather estimate your safety stock by quantity instead of in days, you will prefer setting a static minimum order threshold.
Like reorder points, choosing the right amount of stock to designate as safety stock can also follow a formula. A basic safety stock calculation starts with your maximum daily sales multiplied by your longest lead time in days. Take this result and subtract your average daily sales times your average lead time in days. Your answer should leave you with an exact amount of product to keep as a buffer, which should last you the duration of most supplier delays.
How to Find the Maximum Reorder Point
Maximum reorder points, upper thresholds and desired stock levels are all different names for the same idea. Maximum order points are particularly useful when using minimum reorder points.
Setting the inventory reorder point, or the minimum threshold at which you need to place an order, is only half of the battle. It's best to set up a point to which you should reorder as well. For example, you may have an ideal stock level of 100, but don't want to place an order for one item if you dip to 99. You may, instead, wish to reorder 75 once your stock level reaches 25. This system lets you maximize the efficiency of your reorder point. The reorder point is 25, and your reorder maximum would be 100.
Many software providers can do this for you. If you need to do it yourself, you may use a spreadsheet and set up a conditional statement. The benefit of using a software provider is speed and accuracy. Continuous inventory data means you will receive an alert the moment you reach your minimum threshold. The software will also remind you of your maximum inventory reorder point and how many to order.
Stock Management Problems: What Are the Ordering and Stockout Costs and Risks?
What is stock management? Inventory control, or stock management, is the delicate process of maintaining inventory levels. Ideally, you want to have the right amount of product in the right place at the right time to fulfill your customers' needs. Any more or less can run you into problems. Knowing how to calculate a reorder point using a sophisticated reorder formula is the best way to regulate your inventory levels. It will help you avoid these three stock management concerns:
- Out-of-stocks: Perhaps the most pressing concern resulting from poor stock management is running out of product. When you face a stockout, you miss sales opportunities. Customers will turn to your competitors, who can offer the product immediately. If you're not aware of the depletion in time, you might end up selling products you don't have available. Then, you'll have to send out-of-stock notices to your customers.
- Overstocks: Just as harmful as a stockout, an overstock raises the cost of stocking your products. When items sit unsold in your warehouse, they take up space that could belong to in-demand products. They increase your storage costs and may force you to lower the retail price, denting your profit margins. Understanding your sales velocity lets you accurately estimate how many sales you can make in a given time, allowing you to order only the amount you need.
- Higher ordering costs of stock: When you can't plan your replenishment in advance, you'll be at the whims of your suppliers. Last-minute orders tend to jump in price. Using a reorder point formula that calculates your safety stock in days and accounts for your vendor lead times can prevent this. You'll reorder in time to avoid your suppliers' rush-order fees.
Convenient Reordering Functionality With Finale Inventory
Finale Inventory's dynamic reorder point calculation uses 10 data points to arrive at the right threshold for each item in your inventory. Six of these data points are adjustable, and the other three are calculated automatically. You can choose which calculation method you want to use, whether that's sales velocity or growth rate.
Our sophisticated formula starts with your inputs. You'll tell us:
- Processing time: Your internal processing time factors into your overall lead time. If it takes you five days to receive shipments and stock them in the picking area, your total processing time is five days.
- Supplier lead time: Your supplier's total lead time is the number of days from when you create the purchase order until the shipment is delivered. You can define your supplier lead time as the average amount of time, and rely on your safety stock when it goes over. You can also set your supplier lead time to the maximum amount of time your supplier takes, and keep a leaner safety stock.
- Safety stock: Our dynamic reorder point calculation measures safety stock in days. As a result, your quantity of safety stock will also fluctuate, depending on your sales velocity. This formula allows you to keep only the amount of safety stock necessary to maintain your current sales patterns. You won't hold too much extra stock during your slow season.
- Usage growth per year: How much do you expect to grow this year? Our formula accounts for your planned sales growth. You can set a different percentage for every product on your shelves, depending on your expansion strategy.
- Reorder in a quantity of: Let's say your supplier sells products in set amounts, such as packs of 100 or pallets of 25. This field tells our system that products can't be ordered individually. Finale Inventory will factor this in when determining how many products you should order.
- Days of inventory: How long do you want your supply to last? If you're following a lean inventory method, you might need a 10-day supply. If you're a wholesaler replenishing only twice a year, you might want a 150-day supply.
Finale Inventory will automatically calculate three data points, including:
- Consumption velocity: Your demand or sales velocity is the average daily sales for your selected time frame. You can calculate sales velocity for a 30-day period, a 14-day period or any other interval you desire. Finale Inventory uses real-time stock counts and sales data to find this number automatically.
- Reorder point: Finale Inventory will also calculate your minimum quantity based on sales velocity, total lead times, safety stock time and your expected growth during the replenishment cycle.
- Maximum reorder point: You'll also find an automatically generated maximum order point, which tells you how many units to purchase. It factors in consumption velocity, desired days of inventory as well as your minimum reorder point. When you use Finale Inventory to generate this number, it can transfer over to a purchase order with just a few clicks.
How Do You Use the Reorder Function to Maintain Your Fulfillment by Amazon (FBA) Stock Levels?
When managing inventory for many locations, including FBA, you may want to use separate reorder point calculations for each channel. Your FBA sales may have a different velocity or capacity from your wholesale products or e-commerce store.
In Finale Inventory, you can set reorder points by location for different products. All you have to do is check "use per location reorder configuration" in the product tab of your application settings. Then, you'll configure your reorder point settings for each of your sales channels, including FBA. You can choose between min/max reorder points, where you set your thresholds, and sales velocity order points, where we calculate your reorder point formula.
In the settings, you'll find a reorder point entry field labeled for FBA. You can use your reorder function to maintain stock levels at Amazon. Instead of generating a purchase order from your reorder point notifications, you'll instead create a reorder report filtered by location. You can customize the report to match Amazon's formatting requirements. Our software can also generate a reorder variance report, which will recommend a stock quantity to send to FBA based on your reorder points.
Learn more about Finale Inventory's integration with Amazon FBA and how you can adapt our reordering function to this selling channel.
Contact Us for a Free Trial or Real-Time Demo
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 on an item's full sales potential.
Always remember — a healthy business has a healthy stock level. You need enough to avoid stockouts but not so much that you risk overstocks. Many Finale Inventory customers find our technology lets them keep a leaner inventory while experiencing fewer surpluses and out-of-stock situations. Our dynamic reorder point formula has reduced many e-commerce purchasing teams' workloads drastically.
If you want to know if we can do the same for you, reach out to us online. Our free 14-day trial also comes with free customer support and consulting, so you can discover Finale Inventory's true potential right away. You can also schedule a real-time demo to watch our purchasing and replenishment features in action.