Nowadays, when competition begins to take place under more severe conditions, businesses place great emphasis on methods that will reduce their costs but do not cause any disruption in services. Storage expenses are among the operating expenses of the enterprises. A large amount of product receipts are provided at the same time and keeping them in the warehouse for a long time provides a significant cost increase. In order to overcome this situation, businesses resort to very different storage strategies. One of the storage strategies applied is the reorder point method. Reorder point calculation is usually easily calculated on a given formula. The whole process should be professionally observed to avoid any mishaps in the account.

What is Reorder Point?

Motivated businesswoman placing orders on a phone
Motivated businesswoman placing orders on a phone

The reorder point is a method aimed at eliminating the unnecessary cost that arises due to the storage of more than the amount of the product. Thanks to this method, only products that meet customer demands are kept in warehouses. In this method, which can also be described as a continuous flow model, only the amount of product is stored, and after the demand is met, reinforcements are made in line with the new demands. In this age, when mass production, mass storage and mass marketing methods are largely outdated, all these practices are carried out in smaller pieces. Therefore, the Reorder point method is an increasingly popular method. Storage activity, which leads to high cost figures especially for large enterprises, can be taken under control by this method.

Reorder Point Formula

Closeup of woman hands on calluting Reorder Formula

The formula used for the reorder point, which is among the new trends in storage management, is quite simple. In the reorder point formula is denoted by "r". The delivery time of the ordered products is indicated by "m" and the amount of product requested per unit time is indicated by "c". In addition, a certain amount of product called the security stock is included in the calculation formula. Security stocks are the products that are reserved to prevent product flow from being interrupted in cases such as shipping problems, sudden and unexpected increase in sales and product shortage in the supplier company. In order to determine the reorder point, the average of delivery times must be determined first. The transportation times of the last 6 deliveries are summed up and divided by 6 so that the reorder point is calculated. Then, to calculate the daily demand for the product, the amount of product sold for a month is divided by 30. These two numbers are then multiplied and the result is summed up by the amount determined as the security stock. As a result of this total, the reorder point is obtained.

How to Calculate Reorder Point Formula with Examples

Express delivery service of Reorder
Express delivery service

In order to better understand the point of reordering, it would be better to proceed with an example. Let's assume that the monthly sales capacity of a product is 100 pieces. This number is divided by 30 to find the amount of daily demand required to perform the reorder point calculation, resulting in 3.33. Let's assume the duration of the last 6 deliveries as 4, 6, 4, 5, 6, 5, respectively. To find the average delivery time, these numbers need to be summed up and divided by 6, from which 30/6 results 5. It is necessary to determine the security stock required for application in adverse situations that may occur while delivering this product, in this case let's consider that number as 20 products. In order to find the reorder point, firstly, the daily sales figure must be multiplied by the average delivery time. This corresponds to the 3.33x5 calculation and the result is 16.65. The security stock plus this number and the result of 36.65 is reached. In other words, when the number of products in the warehouse reaches the 36-37 band, it is necessary to reorder.

You may be interested in: What is Variable Cost?

By clicking “Accept”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View our Privacy Policy for more information.