Reorder point formula
When it comes to inventory, the reorder point, or ROP refers to the point in time when a company’s stock reaches a specific level that triggers a reorder of that product. Therefore, it is the minimum amount of inventory items a business will have in stock before needing to reorder further goods. To determine this point, there is the ROP formula,
ROP = demand during lead time + safety stock
The obtain the ROP, you will first need to calculate the demand during lead time. Lead time refers to the time it takes between ordering goods, and receiving those goods. To determine demand during lead time, businesses can multiple the lead time of a product (in days), by the average number of units sold in a day, or,
Demand during lead time = lead time x average daily units sold
The safety stock is the inventory of goods sitting in reserve in case of an emergency, or an increase in market demand. To find the figure that represents the safety stock for a given product, you will need to multiply the maximum daily demand by the maximum lead time, then subtract that number from the average daily orders multiplied by the average lead time, or,
Safety stock level = (maximum daily orders x maximum lead time) – (average daily orders x average lead time)
Once the demand during lead time and the safety stock levels have been calculated, you can plug those numbers into the reorder point formula to determine a product’s trigger point.