What is Reorder Point Formula?
The reorder point (ROP) formula helps you determine the ideal time for re-ordering a product when its stock reaches a certain value. This formula is also known as reorder quantity formula.
Significance of Reorder Point Formula
The Reorder Point Formula plays a significant role in e-commerce. This is because:
- It helps businesses by giving them exact timeline to re-ordering stocks to ensure minimum impact on the supply chain.
- It plays a crucial role in balancing product stocks so that an e-commerce business doesn’t spend much on storage costs or experience product sell outs.
Application of Reorder Point Formula
Product stock availability is important for any e-commerce business to function. That’s where the reorder point formula plays a important role:
- It is used to deduce the point at which stocks will have to be re-ordered.
- The formula helps in efficient warehouse management. It helps avoid excessive storage costs as a result of overstocking or lose out customers due to product unavailability.
- It aids in understanding liquidity or the amount of cash in hand.
Reorder Point Formula
The formula for reorder point is:
Reorder Point =
Lead time demand + Safety stock
Definition of Each Element in Reorder Point Formula
To calculate the reorder point formula, you will require additional parameters like:
- Lead Time Demand: The duration between the order and delivery of your goods. It can be determined by:
Lead time demand =
Average daily usage (No. of orders during time period / No. of days in that time period) x Lead time (Supply delay + Reordering delay)
- Safety Stock: It is a measure of reserve stock to avoid an unexpected shortfall of stock. You can compute safety stock by:
Holding costs =
(Max daily usage x Max lead time) – (Avg. daily usage x Avg. lead time)
How To Use Reorder Point Formula: An Example
Consider for a given period of time, your lead time demand for blue jackets is 45, and its safety stock is 50. Then, your reorder point value will be:
45+50=95
Hence when blue jackets reach 95 in your inventory, you will have to re-order the item.
How To Interpret Results Obtained From Reorder Point Formula
The result you get when you use the reorder point formula helps you determine the ideal time to reorder stocks for different products. It helps you efficiently manage your e-commerce business’ holding cost while preventing stockouts.