The reorder point is the level to which inventory is allowed to fall before a purchase order for further supplies is placed.
A business does not want to run out of inventory as this can lead to lost revenue, on the other hand holding too much inventory means cash is tied up in funding the inventory.
By calculating the reorder point, a business can ensure that the minimum inventory is held while maintaining a level to satisfy demand.
The reorder point formula is given by:
The normal daily demand is the average rate at which the inventory is used in units. The days safety stock inventory is the number of days of normal demand held as a buffer stock to allow for errors in the lead time and demand calculations.
The lead time is the time in days it takes between the inventory being ordered from a supplier and it being delivered to the business.
For example, if the normal demand is 200 units per day and the supplier lead time is 10 days, and a days safety stock inventory of 5 days is needed, then the reorder point calculation gives 200 x (10 + 5) = 3,000 units. When the inventory reaches 3,000 units, the reorder point inventory has been reached and a purchase order should be drawn up to order more from the supplier.
Using the Reorder Point Calculator
The Excel reorder point calculator, available for download below, calculates the reorder point for up to three products by entering details relating to the average daily usage, the safety inventory required, and the supplier lead time, The calculator is used as follows:
- The product name is entered. Enter a product name or reference for the product.
- The average daily demand in units is entered. Enter the average daily demand for the product in units. The average daily demand can be calculated by taking actual usage over a period of time and dividing this by the number of days in the time period. For example, if the usage over one month was 3,000 units then the average daily usage would be 3,000 / 30 = 100 units per day.
- The required days safety stock inventory is entered. This is the number of days inventory demand that is required to be held as a buffer stock to allows for errors in demand calculations, delays in delivery etc.
- The supplier lead time is entered. This is the number of days the supplier takes to deliver a product from the date of placing the order to the date the inventory is delivered to the business. The reorder point calculator calculates the total number of days inventory needed.
- The reorder point is calculated. The reorder point calculator calculates the safety stock inventory in units, the forecast unit demand during the lead time, and finally the reorder point in units. When the inventory reaches the reorder point the business should order inventory for that product.
Reorder Point Calculator Download
Users use this reorder point software at their own risk. We make no warranty or representation as to its accuracy and we are covered by the terms of our legal disclaimer, which you are deemed to have read. This is an example of a tool that you might use to show how to calculate reorder point. It is purely illustrative. This is not intended to reflect general standards or targets for any particular company or sector. If you do spot a mistake in the reorder point calculator, please let us know and we will try to fix it.