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What Is Inventory Reorder Point?

February 06, 2023

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What Is Inventory Reorder point? 


For the success of a business, forecasting and planning your inventory is crucial. Having more stock than the minimal quantity is imperative in organizations as few inventories may result in losing sales. Also, it's important to prevent overstocking as it can raise your storage expenses and reduce total revenues. So, what can help you in tracking all these effectively? This is when Reorder points and inventory reorder management comes into the scenario. Reorder points assist companies in maintaining the least amount of inventory possible without running out of stock. Let’s get to know more about inventory reorder points. 

When inventory needs to be reordered to guarantee that products are available for sale in a timely manner, this is referred to as the "reorder point" in inventory management. Reorder point is the amount of inventory that a company must keep on hand in order to avoid having too much or too little inventory available for sale. It ensures that a company can have a minimum amount of merchandise in stock which helps in avoiding operational problems caused by a stock out. Reorder points will also stop the stock from being held past the safety threshold. This saves a lot of money spent on extra storage fees. 

Only if you are aware of the trends in consumer spending over a specific time period is it possible. You will lose sales if you don't keep enough inventory on hand. Your excess inventory can quickly accumulate, and keeping it may become prohibitively expensive, especially if you need to rent additional space. Customers can be interested in purchasing your goods but be unable to do so. They will therefore probably choose one of your rivals. 


Difference Between Reorder Quantity and Reorder Point 


Reorder Point 

Reorder Quantity 

The stock level of a certain product at which a fresh stock order is placed is known as the reorder point. 

Reorder quantity describes the number of units that will be ordered when a new purchase order is placed. 


Reorder point specifies when to request a new stock of items. 

Reorder quantity specifies how many goods should be ordered. 


Reorder point considerations include things like how much of the product is used during the lead time, the security level, and the renewal term. 

Reorder quantity factors include things like carrying cost of stock per unit, order cost, and other things. 


In Reorder level, you must first determine whether a product's stock level is above or below the reorder level.  


Only when it has been determined that fresh stock needs to be purchased is the reorder quantity decided upon and entered on the new purchase order. 


Being out of stock is the key risk element for Reorder levels. 

The biggest risk element for reorder quantity is the high cost per unit of the desired inventory. 



3 Reasons Why it is Important to Calculate Inventory Reorder Point 

Reorder point ensures that you don't run out of your next batch of products. You'll always have enough inventory on hand to meet client demand if each product has a specific reorder point. Knowing your daily sales, lead times, and safety stock levels will help you determine the reorder point. More justifications for the significance of calculating inventory reorder points include the following: 


Reduction in inventory cost: 

Storing goods, and raw materials more than necessary, and customer demand is not a useful utilization of capital. Reorder points provide businesses with greater financial understanding and allows them to keep the minimum inventory based on the customer’s demand. 


No stockouts: 

While having a large amount of inventory is expensive, having too little might lead to stock-outs. This can be bad for your expanding business. You begin to lose your devoted customers as a result of the customer orders being pushed back or skipped. Reorder points are helpful to keep your inventories at the right level. Also, it aids to place orders for raw materials and new products on time. 


Improved forecasting: 

Knowing the running trends over a certain period is essential to calculating the reorder points. The more frequently you research the ROP for any product, the more accurately you will be able to predict future demand. It will reassure you that you have effectively used the resources at your disposal. 


How to Improve Reorder Point Calculations with the Following 6 Reorder Point Strategies? 


Monitor the level of the inventory order 

Consistently carrying out a reorder point is a crucial tactic for doing so successfully. A reorder point has the advantage of indicating when you should place another order, but it is only effective if you do it at that time. 

Stay cautious 

If your on-site storage costs are minimal and demand is very erratic, you're probably better off ordering before you reach the reorder point. However, if your inventory is perishable, you may be more inclined to wait. It will be more helpful to use automated software to place orders as it ensures to remind about the reorder point. 


Bring sales forecasts with you 

If lead times and daily sales remain constant over the course of several weeks, months, or even years, multiplying daily sales by lead time works well. However, let's say the lead time is three days and you are aware that sales are higher on the weekends. Instead of utilizing your average daily sales in the method, it would be preferable to use your anticipated sales over the next three days as what appears to be adequate inventory on a Monday may not be so on a Friday morning before a busy weekend. In some circumstances, you might even want to look ahead a few days to see what's in store. 


Observe your calendar 

There are several occasions when the lead time is three business days rather than three days. The actual lead time would be longer because it can be challenging to place an order on Thursday and have it delivered by Sunday. You would need to have anything you need for the weekend in by Friday if you wanted to sell it on Saturday or Sunday. This implies that you must place your weekend supply order by Tuesday, which implies that you must consider nearly a week's worth of time rather than just three days. 


Put Order Quantities First 

If you frequently reach your reorder point, it shows that you are not placing a large enough quantity on each reorder. If you're finding it expensive to manage your on-site inventory because of how much you have and you're not placing any reorders, you might have set the amount too high. When reorder point is considered, timing is crucial. Also, the quantity is significant. Economic order quantity calculations which are intended to determine a specific business's ideal order quantity may be helpful if you're having trouble with order quantity. 


Don't over-optimize 

The objective of any deployment is to improve your business, not to maximize a single statistic or procedure at all costs. Imagine you run a business that sells art supplies. Grouping orders together in fewer, larger orders may be more advantageous financially and in terms of your supplier relationships if the majority of them are from the same small number of suppliers. However, if each item has a unique reorder point alert set up, you can find yourself putting in a fresh order every few hours. 

Accoxi is an effective accounting software that helps in managing inventories smartly along with tracking reorder points as and when required. It also aids with core accounting, pos-enabled billing, branch management, easy invoicing, and many other features that contribute to scaling up your business productively. 


Bottom line 

Reorder point is an imperative part of inventory management and having an effective software to handle all these procedures significantly affects a company’s productivity and growth. With best-in-class accounting software like Accoxi, managing reorder point and inventories are no more a hectic task. 

Looking for a cloud-based accounting software for handling all your inventory reorder management and other accounting tasks? Get in touch and know more about Accoxi today and for a free trial.            


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