For eCommerce businesses, one of the most critical components of a successful operation is managing inventory effectively. The ability to accurately and efficiently determine when to order products so that you don’t leave customers waiting or find yourself with too much overhead can make or break your business in an ever-increasingly competitive online marketplace.
One strategy out there is called reorder point (ROP) determination, which involves calculating the balance between customer demand and restocking costs over time. Although it may sound complex at first, mastering eCommerce reorder point determination can provide numerous benefits for any eCommerce entrepreneur looking to better manage their inventory today!
What Is a Reorder Point (ROP)?
A reorder point is the degree of inventory at which a company should place a fresh order or risk having stock fall below a comfortable level, or even to zero, leaving consumers dissatisfied and orders unfilled. ROP usually refers to purchasing inventory to refill stock.
Reorder point logic and mathematics may also be used to major business storefront sites where the “supply” is a warehouse owned by the same firm, as well as purchasing things from suppliers to manufacture the products your business subsequently sells.
Reorder Point Inputs
A simple ordering point calculation considers three fundamental factors or inputs. For example, in a basic situation where the company orders merchandise to sell to clients, the variables are:
- Daily sales volume: How much of this item do you sell each day?
- Lead time: How long does it take from placing an order with your supplier to having the things you bought ready to sell to your customer?
- Safety stock: This is the amount of buffer or contingency inventory you should always keep on hand. It’s a reserve of additional inventory for a sudden rise in demand or an unanticipated delay in deliveries.
eCommerce Reorder Point Formula
The reorder point formula must complete a difficult task: It must ensure that you reorder in sufficient time so that you (1) do not run out of stock and (2) do not go below your safety stock unless something unexpected happens, while also (3) ensuring that you do not order so early that your company costs rise excessively.
The formula for the three-variable model is:
Reorder point = (daily sales velocity) × (lead time in days) + safety stock
How to Calculate a Reorder Point
As an example, suppose you own a successful neighborhood coffee shop that also sells jewelry designed by a local artist. Although jewelry is not your primary business, you sell four daily pieces.
You’ve decided to have a safety stock of 20 items. Maybe the most you’ve ever sold in a day is 14, which is 10 more than your daily prediction, plus you want another 10 on display at all times to highlight the offers. And your supplier, a local artist, requires a reasonable length of time to fulfill an order: five weeks.
What is the best eCommerce reorder point for you?
Looking at the formula — (sales velocity) x (lead time) + safety stock — you may get 40 by plugging in 4 x 5 + 20. But keep in mind that the sales velocity and lead time must be measured in the same time units. If you sell four pieces of jewelry every day and your order takes five weeks (35 days or 7 days for 5 weeks), you may anticipate selling four times 35 = 140 pieces of jewelry while you wait for your replenishment.
When everything is calculated in days, the result is: Reorder Point = 4 × 35 + 20 = 160 pieces of jewelry.
ROP With and Without Safety Stock
Safety stock is typically included in reorder points, as seen by the previously covered standard formula. Even if they don’t state it specifically, it’s a good idea to provide some room for error and unforeseen circumstances.
On the other hand, stores also use BackOrder as a way to allow continuous purchases even during a stockout. Back orders may buy your business more time to restock and adjust your plans for future inventory strategies.
Setting up your reorder point requires effective execution and careful attention to the nuances and specifics of the company, its suppliers, and its clients. Consider contacting us if you need more support with your eCommerce business.