In e-commerce, there are two big inventory problems that can kill your profits:
- Having too much stock: This ties up your money in products that aren’t selling.
- Having too little stock: This means you run out of your best-selling items and lose sales.
Finding the perfect balance is the key to inventory management. The solution is not guesswork; it’s a simple formula for calculating your Reorder Point.
What is a Reorder Point?
A reorder point is the specific stock level that triggers you to order more inventory. It’s designed to ensure that you have just enough stock to keep selling until your new inventory arrives.
The 3 Key Numbers You Need to Know
To calculate your reorder point, you only need to know three things.
1. Lead Time Demand
This is how many units of a product you typically sell during your supplier’s lead time (the time between placing an order and receiving it).
Lead Time Demand = Average Daily Sales x Lead Time (in days)
2. Safety Stock
This is your “just-in-case” inventory. It’s a small buffer of extra stock to protect you against unexpected supplier delays or a sudden surge in customer demand.
Safety Stock = (Max Daily Sales x Max Lead Time) - (Average Daily Sales x Average Lead Time)
For beginners, you can start with a simpler approach: just decide on a fixed number of days for your safety stock (e.g., 7 days of sales).
3. The Reorder Point Formula
Now, you just put it all together.
Reorder Point = Lead Time Demand + Safety Stock
A Simple, Step-by-Step Example
Let’s imagine you sell a popular brand of headphones.
- Your Average Daily Sales: 10 pairs
- Your Supplier’s Lead Time: 7 days to deliver new stock
- Your Safety Stock: You decide to keep an extra 5 days’ worth of sales as a buffer, which is
10 pairs/day * 5 days = 50 pairs.
Now, let’s calculate:
-
Calculate Lead Time Demand:
10 pairs/day * 7 days = 70 pairs -
Calculate Your Reorder Point:
Reorder Point = 70 pairs (Lead Time Demand) + 50 pairs (Safety Stock)Reorder Point = 120 pairs
The result: When your inventory for these headphones drops to 120 units, it is time to place a new order with your supplier.
Tools to Help You Track Inventory
- For Beginners: A simple Excel or Google Sheet is all you need to track your daily sales and current stock levels.
- For Growing Businesses: As you grow, you can invest in inventory management software (like Zoho Inventory or Vinculum) that can automate these calculations for you.
The GridRay Advantage: Predictable Lead Times
The reorder point formula is only as reliable as the information you put into it. If your supplier’s lead time is unpredictable, it’s almost impossible to calculate your inventory needs accurately.
This is where a professional supply chain partner makes a difference. GridRay operates on a network of verified, professional distributors. This means you get predictable lead times you can count on. Reliable lead times allow you to calculate your reorder points with much greater accuracy, which means you can hold less safety stock, free up your capital, and reduce your risk of stockouts.
Conclusion
Effective inventory management is a science, not an art. By moving from guesswork to a data-driven formula, you can reduce costs, increase sales, and build a more efficient and profitable business. Start by tracking your sales and talking to your suppliers today!
