reorder points vs. safety stock

Reorder point vs Safety stock in inventory management

Calculating your brand’s reorder point and the quantity of safety stock is essential for running your inventory management successfully. With precise calculations, you will determine how much safety stock you need on hand. Also, you will plan when to replenish any product you sell.

 

Furthermore, calculating reorder points and safety stock can help you avoid undesirable outcomes like supply chain backlog, extended client wait times, and other inventory-related difficulties that can become hassles. Moreover, with an accurate inventory management system in place, you will be able to obtain the stock required for customer demand fulfillment. This will, in turn, result in increasing your income and brand reputation. 

 

Keep reading the article to go through the peculiarities of the reorder point. Let’s find out how to estimate reordering point and safety stock. We will also cover how much safety stock you should keep on hand.

 

 

Reorder point vs. safety stock 

 

reorder point vs safety stock

 

Knowing how to manage inventory levels, determine precise reorder points, and refill inventories will give your company a competitive advantage. 

 

Keep in mind that, although the terms of reorder point and safety stock are often used interchangeably, there is a clear difference that you should consider. 

 

 

Reorder Point

 

The reorder point (ROP) is the minimal number of units a company must have in stock to avoid stock-outs and assure order fulfillment. When inventory levels approach the reorder point, the replenishment procedure is triggered to restock that item. The primary objective of reorder point is to ensure that your company can maintain inventory at a level that can consistently meet consumer demand. 

 

The reorder point is generally based on prior sales to help you anticipate the item’s future sales. Reordering point strategies cannot fully prepare you for all sorts of challenges and delays that may arise in your inventory management. However, they can give you a dependable means to guarantee your warehouse remains supplied.

 

It is essential to calculate and consider every detail of the reorder point. This will help you avoid significant lag periods and reduce the possibility of back-ordered popular products.

 

 

Safety Stock

 

It is essentially an extra inventory that a firm keeps on hand to avoid running out of stock. Safety stock is crucial, especially if you’ve overestimated the reorder threshold or there is a supply chain failure. It will help you satisfy customer demand and deliver orders according to the deadlines, keeping your customers satisfied. 

 

Safety stocks are exceptionally efficient for items and products that are popular and demanded. Having an excess supply of the most popular things on hand in the warehouse will ensure that requests for such products are filled as soon as possible. On the other hand, it is also essential to keep balance. You should avoid over-purchasing products that are rather unpopular or a product that isn’t ready for market. It can result in unnecessary financial expenses on storage and marketing of excess units.

 

 

Critical factors essential for the reorder level

 

It is essential to understand that the reorder point varies for each product and is heavily impacted by two crucial factors: daily sales velocity and lead time.

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Daily Sales Velocity

 

Daily sales velocity, or in other words, the average number of units sold each day, varies depending on what you sell. It is essential to understand that each item or product in your has a distinct sales velocity. You may have a product that constantly sells, necessitating you to supply it more frequently and in larger quantities than other goods. Moreover, specific goods may sell quicker during certain seasons, leading your sales velocity to increase momentarily. In order to determine a product’s reorder point effectively, you must first understand the abovementioned factors and how they may affect your sales velocity.

 

 

Lead Time

 

Another major factor for understanding reorder points is lead time. It is the length of time it takes for an ordered supply to arrive from your supplier. Supplier delays can cause issues with inventory management, resulting in a shortage of your goods. Delays can have drastic effects, especially when it comes to popular items. Not being able to deliver demanded products on time can have a negative influence on your company’s general image. It can also negatively affect customer reviews. Moreover, if the client service starts to deteriorate because of delays, your customer base might choose your competitors with more dependable and constant inventories.

 

How to calculate reorder point and safety stock?

 

Keep in mind that if you purchase products and items too soon, you will have extra inventory that will cost you money to keep. 

 

On the other hand, you risk running out of stock and losing sales if you order too late. 

 

So, to determine a precise reorder level, you need accurate formulas to tell you when to restock. The procedure for determining your inventory reorder point is straightforward:

 

Reorder point formula= Lead time demand + safety stock 

 

So, to estimate reorder point formulas, you must first calculate your lead time demand and safety stock levels. 

 

How to estimate safety stock?

 

To calculate safety stock, it is essential to have a purchase and sales order history. Once have the data on hand, you will simply need to utilize the following simple safety stock calculation:

 

(Maximum daily consumption * Maximum lead time in days) – (Average daily usage * Average lead time in days) = safety stock

Interested to read more on reorder point vs safety stock? Read our blog posts about reorder point formula and safety stock.

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