Reorder point is the inventory level at which you should place a new order to replenish stock before it runs out. Combined with safety stock (buffer inventory), these calculations help Pakistani businesses avoid stockouts while minimizing excess inventory.
This guide explains how to calculate reorder points and safety stock with practical formulas and examples relevant to Pakistani business conditions.
What is Reorder Point?
The reorder point (ROP) is the minimum inventory level that triggers a new purchase order. When stock falls to this level, you order more. Set correctly, you receive new stock just as existing inventory runs out—no stockouts, no excess.
What is Safety Stock?
Safety stock is extra inventory kept as a buffer against uncertainty—unexpected demand spikes or supplier delays. In Pakistan, where supply chain disruptions are common (transport strikes, port delays, Eid rush), safety stock is essential.
The Basic Reorder Point Formula
Reorder Point = (Average Daily Sales × Lead Time) + Safety Stock
Where:
- Average Daily Sales = Units sold per day
- Lead Time = Days from order to delivery
- Safety Stock = Buffer inventoryExample Calculation
A Lahore retailer sells 20 units of a product daily. Supplier takes 7 days to deliver. Safety stock is 50 units.
Reorder Point = (20 × 7) + 50 = 140 + 50 = 190 units
When inventory reaches 190 units, place a new order.Calculating Safety Stock
Several methods exist for calculating safety stock:
Method 1: Basic Formula
Safety Stock = (Maximum Daily Sales × Maximum Lead Time) - (Average Daily Sales × Average Lead Time)
Example:
Max daily sales: 30 units
Max lead time: 10 days
Avg daily sales: 20 units
Avg lead time: 7 days
Safety Stock = (30 × 10) - (20 × 7) = 300 - 140 = 160 unitsMethod 2: Fixed Days Supply
Simple approach—keep X days worth of extra stock:
Safety Stock = Average Daily Sales × Safety Days
Example:
Avg daily sales: 20 units
Safety days: 5 days
Safety Stock = 20 × 5 = 100 unitsMethod 3: Percentage of Lead Time Demand
Safety Stock = Lead Time Demand × Safety Percentage
Example:
Lead time demand: 140 units (20/day × 7 days)
Safety percentage: 30%
Safety Stock = 140 × 0.30 = 42 unitsFactors Affecting Reorder Point
Demand Variability
If sales fluctuate significantly, you need more safety stock. Analyze your sales data to understand patterns.
Lead Time Reliability
Pakistani supply chains can be unpredictable. Consider:
- Local suppliers: 1-3 days (usually reliable)
- Inter-city suppliers: 3-7 days (transport delays possible)
- Imported goods: 30-60+ days (customs, shipping delays)
Seasonal Patterns
Adjust reorder points for Eid, Ramadan, wedding season, and other peak periods. You may need 2-3x normal safety stock.
Product Criticality
High-margin or essential products deserve higher safety stock. Dead stock risk is lower than lost sales risk.
Reorder Point by Industry
| Industry | Typical Safety Stock | Key Considerations |
|---|---|---|
| Retail (FMCG) | 7-14 days supply | High turnover, frequent ordering |
| Wholesale | 14-30 days supply | Larger orders, longer lead times |
| Pharmacy | 14-21 days supply | Critical items need more buffer |
| Electronics | 21-30 days supply | Import dependency, model changes |
| Manufacturing | 30+ days supply | Production stoppage is costly |
Setting Up Reorder Points in Your Business
Step 1: Gather Data
- Historical sales data (minimum 3-6 months)
- Lead time records for each supplier
- Past stockout incidents
- Seasonal patterns
Step 2: Categorize Products
Use ABC analysis to prioritize:
- A items (high value): Calculate precisely, review frequently
- B items (medium value): Standard formulas, monthly review
- C items (low value): Simple rules, less frequent review
Step 3: Calculate and Set
Calculate reorder points for each SKU. Enter them into your inventory management system.
Step 4: Monitor and Adjust
Review reorder points quarterly or when conditions change (new supplier, demand shift, seasonal changes).
Reorder Point Alerts in Software
Modern inventory software automates reorder point management:
- Automatic alerts: Get notified when stock hits reorder level
- Suggested orders: System calculates optimal order quantity
- Demand forecasting: AI-based prediction of future needs
- Supplier integration: Auto-generate purchase orders
Common Mistakes to Avoid
- Using averages only: Ignoring variability leads to stockouts
- Set and forget: Reorder points need regular updates
- Same safety stock for all: Different products need different buffers
- Ignoring lead time changes: Supplier reliability changes over time
- No seasonal adjustment: Peak seasons need higher buffers
Frequently Asked Questions
How often should I review reorder points?
What if my supplier lead time is unreliable?
Should I use the same safety stock for all products?
What is Economic Order Quantity (EOQ)?
How do I handle seasonal products?
Conclusion
Proper reorder point and safety stock calculations balance the costs of stockouts against the costs of excess inventory. Take time to calculate these properly, and review them regularly as your business conditions change.
Need help managing reorder points? HysabOne automatically tracks inventory levels and alerts you when stock reaches reorder points. Contact us on WhatsApp for a demo.
Last Updated: December 2024