Online companies can accomplish their goals with experienced staff members who can make correct financial calculations. To succeed in the online retail industry, you must have a firm grasp of the timing and quantity of products required to complete orders. You may show your proficiency in inventory forecasting and contribute to your company’s profit maximization efforts by doing these calculations correctly and efficiently. Both the amount of inventory ordered and the time must be exact. With all the information you need, you can automate the re-ordering process.
Understanding Reorder Level
Reorder level, often referred to as reorder point, is the inventory threshold at which a business initiates replenishing stock. A predefined quantity indicates when new stock should be ordered to prevent running out of inventory. In most cases, each SKU (Stock keeping unit) will have a specific reorder point, met when the number of SKUs in storage falls to a predetermined level. Once the SKU reaches this level, the stock should be replenished as soon as possible.
The reorder level is calculated based on factors such as average demand, lead time (the time it takes to receive the stock after placing an order), and safety stock (buffer stock to handle unexpected demand or supply delays).
Why is Reorder Level Important?
Various reasons make reorder level important if you want to ensure organization in your inventory and efficiency in your delivery.
1- Keeping your reorder level calculated to ensure that there is sufficient inventory to meet customer demand without disruptions.
2- Reorder level updating optimizes your inventory levels by preventing overstocking and understocking by maintaining a balanced inventory.
3- It helps deliver products on time, leading to better customer trust and loyalty, ensuring satisfaction.
4- In the end, it reduces the risk of emergency orders or production halts caused by stock shortages.
5 Steps to Calculate Reorder Level in 2025
Here are five simple steps to calculate your reorder level or reorder points:
1- Determine Your Average Demand
Find out what the average demand is for the product or commodity. That’s the first stage. This is the total number of units of a given commodity that you use or sell within a given time frame. Dishes, shoes, computers, and other retail items may be necessities for you on a daily, weekly, or monthly basis. A certain amount of production material may also be required at some point.
You should attempt to estimate your inventory usage over multiple periods and then use the average of those figures because demand could shift from one period to another. This may be particularly the case for companies or goods whose success is contingent on circumstances beyond their control.
2- Calculate Your Lead Time
The lead time is the time it takes to go from placing an order to receiving the products. When determining the lead time, make sure you use the same time unit (days, weeks, months, etc.) as when determining the average demand. If 100 items are required per day on average, you need to determine the lead time in days. If your demand was 100 products each week, the wait period would be measured in weeks.
If your deliveries are consistent, you should be able to determine your lead time only by reviewing your purchase and delivery records.
If delivery schedules are variable, find out how long it usually takes to fulfill many orders. If external factors impact the duration of a delivery, alternate lead times should be utilized.
3- Decide if You Should Keep a Safety Stock
It is a personal choice whether to keep a safety stock. The algorithm you use to determine your reorder level will vary depending on the circumstances. Some products or supplies may be kept on hand by a company as a precautionary measure in case of unforeseen events, such as a surge in demand or an issue with delivery. Looking at the ratio of your stock on hand to your sales or use might give you a good idea of whether your inventory needs a safety buffer.
Collaborating with a company leader can help you figure out if your company has a policy of keeping a safety stock and how much you should replenish based on this. Make sure everyone is aware of any changes you propose or make to your inventory levels.
4- Use the Reorder Level Formula
Finding the right method to use your typical demand, lead time, and safety stock to determine reorder levels is essential.
Explanation
- Average daily usage: The number of units of a product sold per day. You can calculate this by dividing the monthly sales by 30.
- Lead time: The time it takes for an order to be delivered.
- Safety stock: The amount of inventory that should be kept on hand in case of unexpected demand.
Make sure that the units of time used to compute average demand and lead time are identical. If your daily product demand is measured in units, then your lead time should be computed in days. You should also measure your lead time in weeks if that is how your demand is also expressed. Make sure your calculations are accurate by working on them at the same time or by asking a teammate to help you out.
Another resource for learning about the Reorder Quantity Formula is this in-depth article.
5- Assess and Adjust as Required
Last but not least, double-check your reorder level estimates and tweak them as needed. When you see that you’re running low on an item before your next shipment arrives, for example, you may need to change your reorder level to reflect the higher demand. If you see that orders are arriving at different times, you may need to adjust your reorder level.
Determining a Fixed Reorder Level Stock
A fixed Reorder Level Stock is determined by considering the following factors
1- Rate of Material Consumption
It is the quantity of raw materials or finished goods sold during a certain time frame. The products and materials are averaged according to the time frame.
2- Safety Margin
Make sure you have an extra supply on hand before figuring out how much to reorder in case demand is higher than expected.
3- Delivery Period or Lead Time
When you place an order with a merchant or manufacturer, the average time it takes to obtain the stock is called the average delivery period or average lead time.
4- Maintaining a Minimum Stock Level
Sellers with limited storage space in various locations, as well as small and medium-sized businesses, can benefit greatly from minimum stock-level maintenance. This helps maintain your company’s inventory stable and predictable.
5- Storage Fees and Interest on Materials-Related Capital Investments
You must give careful consideration to this aspect. You can determine your inventory needs and place orders based on your ability to meet those needs. If you own your storage facilities, this won’t apply to you. However, if you work with a third-party fulfillment firm and keep your goods in their fulfillment centers, you’ll have to pay a subscription fee for the storage space you use.
6- Having an Emergency Fund
Put aside a cushion of liquid funds to deal with unforeseen events like equipment failures, supply chain disruptions, rate hikes, etc. The logistics chain frequently experiences work halts as a result of outstanding payments for specific procedures. Learn the ins and outs of eCommerce logistics planning.
The Reorder Level of Stock Calculation in Different Circumstances
Case 1 – Without Safety Stock
Weekly, 200 books are sold in Mr. XYZ’s bookstore. The maximum number of computers allowed each week is 217. Here, with a three-week advance time, the following outcomes would be produced using the reorder level method:
Reorder level = Maximum usage(weekly) × Lead time (in weeks)
= 217 units × 3 weeks
= 651 units
It means that every time the number of books decreases to 651, Mr. Sanjay’s bookstore must place a new order.
Case 2 – With Safety Stock
Suppose you are a bike seller with the following figures:
Demand
Minimum Demand: 40 bikes per month
Average Demand: 50 bikes per month
Maximum Demand: 60 bikes per month
Safety Stock: 15 bikes
Lead Time
Minimum Lead Time: 1 month
Average Lead Time: 1.25 months
Maximum Lead Time: 1.5 months
The reorder level of your outlet using the reorder point formula would be:
Reorder Level = (Maximum Demand × Maximum Lead Time) + Safety Stock
= (60 units × 1.5 weeks) + 15 units
= 90 units + 15 units
= 105 units
Note: Both demand and lead time must be expressed in the same time unit, i.e., in days, weeks, etc.
Modified Reorder Level Formula
Typically, the amount that needs to be replenished is predicated on the false premise that consumption of inventory remains constant. To give an example, if the reorder level is too low and the utilization levels are highly unpredictable, a manufacturing shortage of inventory could emerge.
This reorder action, however, will result in an overabundance of inventory if actual usage decreases. It may be helpful to modify the reorder point calculation to account for available spare inventory and utilize the maximum daily usage rate rather than the average to prevent running out of stock.
The formula for the revised ordering level is as follows:
| [(Maximum Daily Usage Rate x Lead Time) + Safety Stock] |
Finally, Why You Should Use WareIQ for More Precise and Rapid Reorder Levels
Now that we know how important reorder points are, it’s easy to see how establishing them can help your company save money on capital investments and have better inbound and outgoing logistics.
Supply chain planning and providing a comprehensive picture of customer demand depend on accurate reorder point determination, which can be both the most crucial and the most challenging aspect of the process. There can be too much or too little of a certain item due to inaccurate data and estimates.
FAQS
How do you calculate the reorder level?
The following formula can be used to find the reorder levels:
Normal stock plus the product of average demand and lead time is the formula for the reorder level.
Why is the reordering point important?
An important component of effective inventory management is a reorder point. By always having just the right amount of inventory on hand, you may avoid stockouts, overstocking, and missed sales opportunities while cutting down on holding expenses.
What is the Safety Stock Formula?
To get at the final figure, multiply the intended service factor by the safety stock. This factor shows how much and how often the real and typical lead times differ.
