How To Calculate A Re-Order Point

Optimize your supply chain by knowing how much to re-order and when

Re-Order Point
Re-Order Now. Getty Images

Re-order points are quantities ("I will re-order 'X' amount") and are functions of time.  You track the "amounts" of your inventory by using a unit of measure or UOM.  UOM's are typically eaches, gallons, bars, meters, yards, kilograms, etc.  For this exercise, we'll use eaches as the UOM. 

The first variable you need to consider when calculating the re-order point of an each is low long it takes to get it resupplied.

  If, after you re-order it, it takes 4 weeks for your supplier to deliver it - you know you need to get your order to to your supplier at least 4 weeks prior to when you'll run out.

That leads us to the second variable.  How much will you consume during the 4 weeks it will take you to get the product from your supplier?  If you sell (or put into production or otherwise consume) 10 eaches per week.  Then you'll need to re-order at least 40 eaches (4 weeks x 10 eaches per week). 

The next variable - does your supplier have a minimum order quantity or order multiples you need to consider?  If your supplier has a minimum order quantity of 50 eaches but you only need 40 eaches, you may need to order 50 eaches instead of 40 (unless you can negotiate an exemption to the minimum).  Or if the supplier only sells in order multiples of 25 eaches, you may need to order 50 eaches instead of the 40 eaches you've calculated that you need.

 

Other variables include time variables (shipping lead time, warehouse processing time, quality control inspection time, etc.) and quantity variables (safety stock, seasonality of demand, product end of life, etc.). 

Supply chain optimization - "shipping your customers what they want, when they want it - and spending the least amount of money doing it" - depends upon understanding and implementing processes - like well-calculated re-order points.