What Is the Reorder Level of Inventory? How is the Reorder Point Calculated?

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Understanding how to do business calculations is essential for your business to succeed. In retail and eCommerce, you should know when and how to reorder items so the business can effectively meet sales. These calculations need to be made accurately, so there is no excess or shortage of inventory. Performing these calculations manually allows you to showcase your ability in the workplace and enhance revenue. For restaurant inventory management the inventory must always be optimally stocked to meet customer orders at the right time.

Let us first see what reorder point is and how it can be calculated.

What Is a Reorder Point?

A reorder point is the level at which inventory should be restocked in order to keep the business running smoothly. Calculating this point accurately can ensure that the business can place orders for an exact amount of stock at the right time to increase revenue and reduce losses. This can also help to avoid factors such as inventory wastage. Reorder levels are calculated based on a formula that is not constant and changes according to whether the company wants to maintain a safety stock or order extra products to not miss out on sales. You can utilize inventory planning software to obtain all the data accurately and calculate the reorder point.

The formula for calculating reorder level for a company that does not maintain a safety stock is as follows:

Reorder Point = Lead Time x Average Demand

The formula when companies maintain a safety stock is:

Reorder Point = Average Demand x Lead Time + Safety Stock

Why Is a Reorder Point Essential?

Reorder points are essential as they assist a business in maximizing its productivity and enhancing profits. Ordering the correct amount of inventory can enable the business to function smoothly while preventing wastage due to overstocking. Correct reorder points can lessen carrying expenses and the costs related to maintaining inventory. Carrying costs include insurance, rent, and any wastage that might occur.

Calculations of reorder stock bring unity among team members when different individuals are in charge of placing orders.

How to Calculate Reorder Level?

Steps which you should follow for calculating reorder point are as follows:

Lead time is when the order is placed, and the shipment is received. You should determine the lead time utilizing the exact unit you will use to determine your average demand. If your average demand is 100 items per day, you should figure out the lead time in days.

If the average demand is in weeks, the lead time should be weeks. If the deliveries have been constant, then the order and delivery record can be checked to identify the lead time. If the delivery time is variable, you need to average the time between placing the orders and when the products were delivered. You can also use different lead times if the lead time is dependent on external factors. This can be done smoothly with inventory planning software.

2. Determine the Average Demand

You would also want to determine the average demand for a particular product. It means the amount of a specific product sold within a particular time. You can calculate the average demand either daily, monthly, or yearly.

You should calculate your inventory usage in different selected periods and average those numbers as demand varies from time to time. It is essential for products that are influenced by external conditions.

3. Decide if You Want to Maintain a Safety Stock

Depending on whether or not you want to maintain a safety stock, you need to use a different formula for your reorder point. Safety stock is the amount of product that is kept on hand to meet a sudden surge in demand or when the delivery from the suppliers is taking longer than usual. You should compare the amount of stock you maintain with the amount sold to identify whether a safety stock is included in the inventory. Contact the business leaders about the business policy regarding safety stock and clarify if it should be included in the reorder point calculation. This ensures effective restaurant inventory management.

4. Use the Reorder Point Formula

By using the average demand, safety stock, and lead time, you should calculate the reorder level with the appropriate formula, as mentioned above. You should be careful to use the same time unit for lead time and average demand. You may take assistance from a team member or perform the calculations collaboratively to ensure they are accurate.

5. Analyze and Modify as Needed

You should constantly analyze your reorder point and make modifications when needed. If you see that you need more stock before the arrival of the next order, you should recalculate your reorder point depending on the increased demand. When you notice orders reaching sooner or later, you need to modify and adjust the reorder point accordingly.