Safety stock vs reorder point: balancing cost and inventory management

We just multiply the average lead time for our inventory order, let’s say 3 days, by the 10 hoodies sold each day. As the name suggests, safety stock is the inventory you keep on hand “just in case” there’s an issue with selling or receiving your inventory. Whether you’ve just started a new business or sold products for years, anyone can benefit from using the reorder point formula. This post will show you what that is, why it’s useful, and which numbers you’ll need to generate a reorder point. Holding too much inventory ties up capital and eats into business profits with increased carrying costs. At the same time, not enough stock causes slow order fulfillment, the potential for missed sales, and lost revenue.

It is a very strict inventory model and will only work for certain businesses. Reorder point calculators are a convenient choice if you have a large inventory with many SKUs. One may be a part of the inventory management software you use or you can use an Excel sheet with built-in formulas. The optimal reorder point will maximize the profit you can make from your stock and avoid surplus inventory in your warehouse. This is the point at which you need to order product to replenish your stock. For enterprise-level solutions, there are countless calculators, many of which come with automated inventory management systems.

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If you order when you have zero stock on hand, you’ll be unable to make sales for as long as it takes to receive the order. The your vendor takes to supply the items, the more sales you’ll be losing. Setting a reorder point helps you optimize your inventory, replenish your stock of individual items at the right time, and meet your market demand without going out of stock. While businesses can’t completely avoid these issues, they can mitigate them with smarter inventory management.

About 46% of small-scale business owners either don’t track inventory or use a manual method for inventory management. If you hold no safety stock, you should reorder these hoodies when you have 30 left. Easyship can help you automate much of your inventory and order management with the right platform integration and 3PLs.

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This way you can order product earlier if you discover any issues when inventory forecasting. The formula to determine optimal reorder point is the same as above. The main difference is that you must calculate your reorder point for a product each day. This will update your data and let you determine the most optimal time for reordering. It also allows you to notice sudden shifts in demand and react accordingly to avoid causing the bullwhip effect in your supply chain. Reorder point is not a stable number, but is flexible based on sales trends and the demand cycle of a given product.

• A modern inventory management system can bring greater efficiency to inventory processes through automation and digital tools.
• By doing so, the company can prevent stockouts and avoid dipping into safety stock while they wait for new stock to arrive.
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• He loves sharing his thoughts on eliminating delivery management challenges via blogs.
• In view of instantaneous replenishment of stock the level of inventory jumps to the original level from zero level.

If you wait to order until you have run out of inventory, then there will be a lag between when you place the order and when you can sell your new inventory. Setting a reorder point can help you reorder in time to avoid this availability gap. Knowing your ROP helps you place an order with enough time to receive, process, and restock it. Customers come around, they’re checking the shelves, they’re looking for a certain product, but you don’t have it because you didn’t order enough or didn’t receive them on time.

How to Find Safety Stock Levels

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