The reorder point tells us when we should place our next order for inventory, and the Economic Order Quantity formula tells us how much.
When it comes to managing your inventory, understanding appropriate reorder points and quantities for each of your products means:
- You will be less likely to run out of stock
- You won't accidentally order too much, unnecessarily tying up cash
The amount you should consider ordering will depend on how frequently you plan to place orders and whether or not there is a minimum order quantity required by your supplier.
In general, we can find the reorder point by considering these variables:
- Lead time to replenish stock (between point of order and new product arriving)
- Expected units sold over lead time (important to consider Sales & Marketing efforts)
- Number of days we'd like to have as a safety buffer (30 days is common)
- Expected units sold over safety buffer
- Lead time demand + safety buffer = reorder point
An example of planning out how LT (Lead Time), expected demand and DoS (Days of Stock, or safety stock) work together:
Here are a couple detailed explanations of when to think about reordering inventory:
Determining the exact amount to order can be found by using the Economic Order Quantity (EOQ) formula, as explained by Investopedia.