Re-order periods are a crucial part of effective inventory management. Helping to control space usage, cashflow and simplify supplier relationships.
By optimising reorder periods you can increase your operational agility, helping reduce stock outs – periods where your products are out of stock and unavailable for purchase – make more cost efficient decisions regarding freight shipping, and lower your storage costs.
Re-order periods can also be used as part of other inventory management KPIs such as your re-order point.
A reorder period is the amount of time you need to allow for new stock to arrive after placing an order.
It is calculated by measuring previous order and goods-in data or adding manufacturing lead times to estimated shipping times.
Re-order level is the threshold at which you need to re-order stock or risk selling out before the next shipment arrives, taking into account: demand, lead time (or re-order period) and safety stock.
It is calculated as: (average daily demand x Leadtime) + safety stock.
For example: If you sell make up brushes that you buy in from a manufacturer in China. Your most popular set sells on average 45 a day and it takes on average 50 days for the goods to clear customs and arrive with you by sea freight from the manufacturer. Your re-order period would be: 50 days (lead time + shipping time). Your reorder level would be: 2,250 + safety stock
How to calculate safety stock :
Safety stock = (maximum daily sales x maximum lead time) – (average daily sales x average lead time)
Taking our earlier example of a makeup brush business, lets say that the highest sales they achieve in a day for this set is 70 but the average sales is 45 a day. Average re-order period is 50 days, but it can be as long as 60 days.
Safety stock of beauty brushes = (70 x 60) – (45 x 50) = 1,950
Lead times can vary depending on the amount you order, the supplier you use, the shipping method chosen and many more factors. By using an averaged figure you are going to be falling short should the worst case scenario happen which can leave you in a difficult situation.
Solution: Use safety stock or safety lead time
This will ensure you have a buffer to allow for any unseen fluctuations such as sales surges or supply chain disruption.
The majority of inventory calculations require a demand figure in order to gauge how quickly stock diminishes. As sales are impacted by a huge number of factors from marketing, to wider trends and consumer behaviour its important not to ensure you are accurately forecasting demand when inputting this into the formula or it will make all of your calculations inaccurate and provide less value to the business.
Solution: Regularly update forecasts with real-time data.
Regularly review your forecasts, paying particular attention to organic growth rates, marketing spend, planned promotions and trends. The more accurate the data you put into the calculations is, the more accurate the output will be.
For some highly seasonal products, up to 80% of sales take place in the final months of the year over the Christmas peak. With such huge fluctuations in demand, if you do not account for seasonality you are likely to over order during quieter periods of the year or conversely run out of stock of items when demand spikes.
Solution: Adjust reorder periods for seasonal fluctuations.
Don’t underestimate the importance of seasonality and re-order periods. If your stock takes months to get to you from the supplier you may need to adjust your re-order levels much sooner than anticipated or face a costly mistake.
If you don’t allow enough time for your next order to arrive, in other words, your re-order period is shorter than the actual lead time for stock to arrive, you are at risk of stockouts which means that you will run out of stock completely and miss out on potential sales.
If you allow too much time for your next order to arrive, in other words, your re-order period is longer than the actual lead time for stock to arrive, you are at risk of paying extra storage fees. At Huboo, if you are on our item storage plan, you would have to pay for each individual item that sits in our warehouse for longer than 2 months, other fulfilment or storage partners may charge a daily or weekly pallet charge so fees can quickly rack up!
Each inventory management calculation is only as reliable as the data you put into it. If you improve the accuracy of your demand forecasting or your supplier is very reliable, the accuracy of your re-order point will become more accurate.
Many ERP and inventory management systems will provide tools for re-ordering. We are partnered with Brightpearl and Inventory planner which both offer functionality to help you forecast stock and automate this process. You can also use tools like Shopify Scripts to automatically notify you when inventory thresholds are met.
