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Retailers, wholesalers, traders and even service providers need to maintain enough inventory and reorder timely. However, how can you decide when to reorder? Is there any proven formula for replenishing the stock? The answer to this question is yes. This article will explain the formula of reorder, what quantity should you reorder and a few tips for reordering and managing inventory. Let’s first understand why timely reordering is important.
Why timely reordering is important?
For any retailer, wholesaler or e-commerce seller, a few nightmarish scenarios could be either running out of stock or overstocking. Both scenarios can be harmful to the business and can have a direct impact on profits. Therefore, it is important to reorder enough quantity.
Also, it is important to reorder on time. Your existing stock should last until you receive your reordered quantities so that you do not run out.
What is the formula for reorder?
The formula for reordering quantities is:
Reorder level = average demand × lead time
Defining average demand and lead time
In order to apply the above formula into practicality, you need to first determine average demand and lead time.
What is average demand and how to calculate it?
Average demand or average daily usage (ADU) is units of a particular product you sell on a per day basis. Usually, a period of 30 days is considered to calculate the average demand for a product. You can easily calculate by dividing your monthly sales of a product by 30. The formula for calculating average demand is:
Average demand is: Total monthly sales of a product/30
For example, if you are a retailer of toys and sales in May for soft toys are 300 units. Then, your average demand is:
The average demand for soft toys is: 600/30 = 20
What is the lead time and how to calculate it?
Lead time is the time it takes for the order to be delivered to your location or the time the shipment takes to reach you. Meaning if the same toy retailer places an order on the 10th of the month and he/she receives it on the 16th of the month, then the lead time is 5 days.
You need to consider other factors too while calculating lead time such as quick delivery of orders due to all favorable factors and disruptions caused delays, you need to calculate the average lead time. Additionally, low and high demand might affect the lead time.
How to calculate reordering quantity?
Now that we have figures for calculating reorder levels, it can be put into the formula.
Reorder level = 20 per day demand for soft toys × 5 days of leading time = 100 units to reorder
It means that the toy retailer will need to reorder 100 units of soft toys.
Reorder formula with safety stock
Sometimes, it is difficult to arrive at average demand figures because of the fluctuating demand. For example, demand for school supplies is usually high during the start of the academic season. Some of the other examples include products such as umbrellas and festival decoration items that are in demand only for a specific time of the year. Taking the example of the same toy retailer, the demand for soft toys may go up during the festive season.
In order to deal with such high and low demand, retailers prefer to keep safety stock. It means that retailer prefers to keep a certain number of units in inventory to deal with a scenario such as a sudden surge in demand. However, it is the business owner’s decision to choose to keep safety stock in the inventory.
In case you choose to keep safety stock, the reordering formula slightly changes to the following:
Reorder level = average demand × lead time + safety stock
In anticipation of a surge in demand, the toy retailer decides to keep 20 soft toys as safety stock. Then the calculation changes to:
Reorder level = 20 per day demand for soft toys × 5 days of leading time + 20 units of safety stock = 120.
Concluding remarks: Tips to reorder the right quantities
Here are concluding tips to reorder the right quantities.
- The demand for products fluctuates, therefore it is best to calculate average demand with the latest available sales figures.
- The same goes for the lead time. Lead time may change according to supply chain disruptions, demand surges, etc., which are some of the factors that may affect the lead time. Therefore, you need to calculate it with the latest figures.
- Keeping safety stock is not necessary for every business. Every business’ needs are different. Hence, you need to determine safety stock as per your business needs.
- Robust inventory management enables to accurate demand forecast. It in turn enables to you reorder correct quantity.
- It is best to draw procurement strategy that can help you and your employees to reorder the right quantity.