Zoho Inventory Reorder Points
Calculating Reorder point and Safety stock
What is a reorder point?
A reorder point is a threshold that helps you maintain the right inventory level. It’s a tool for keeping tabs on the inventory level of your items so that you do not run out of stock.
Whenever the item count reaches the reorder point, you get automatically notified and you know it is the right time to create a purchase order with your supplier. The threshold is calculated based on your historical average demand and safety stock.
- A reorder point keeps your business from running out of stock
- You order items at the right time, not too early or too late
- It also optimizes your holding costs and cuts down the chances of overstocking
What is safety stock?
Safety stock is like an extra cushion for your business. Safety stock adds some comfort by keeping you safe from fluctuations in your sales numbers.
To understand how safety stock works, imagine you have set the reorder point for your item at 20 units. When your item count reaches this point, you will create a new purchase order. But what if there is a delay on your supplier’s end? You might run out of stock before you replenish the items.
Safety stock ensures you have enough on hand to avoid such a situation. It covers the risk of unexpected delays and cuts down the chances of going out of stock.
- Safety stock is an extra measure to keep your business safe from running out of stock
- It saves your business from fluctuations and delays
- It reduces the chances of turning down a customer request due to stock unavailability
What are the components of a reorder point?
The lead time and variability in demand together make up a major part of the reorder point formula. Once these two variables are calculated, you will get the amount of items you need to maintain as safety stock. When the safety stock number is added to the average demand, you have your reorder point.
Calculating your safety stock is a crucial part of finding your reorder point. Safety stock incorporates the fluctuations in supply and demand, which gives a more reliable reorder point. In the following section, we have explained each variable of the reorder point formula and how it’s calculated, with special emphasis on safety stock.
Demand refers to the number of units that you sell to your customers in a given period of time. But the number changes every day, month, and year, so to arrive at a common figure, we calculate the average demand. If you are calculating the safety stock for a year, then your average demand will be:
