22 June 2022

Order point: what it is and how to calculate it

22 June 2022

Learn more about the reorder point, an important indicator for keeping your inventory always stocked.

We recently published a post here on the Blog where we presented tips on how to avoid stockouts and excess inventory. One of the recommendations presented, aimed especially at preventing stockouts, was to calculate reorder points. This is a fundamental strategy to ensure that the warehouse is always stocked and ready to meet customer demands.

The reorder point (ROP) refers to the right time to make a replenishment purchase of stock. It is not based on instinctive decisions but on a calculation that allows you to know the minimum stock level of each product. Therefore, when this value is reached, it means that a new order needs to be placed with the supplier.

The great importance of calculating the reorder point is that it gives you much more precision during stock replenishment. Your instinct does not always manage to identify the ideal time to place a purchase order. On the other hand, your historical data and lead times do. In this way, the reorder point ensures that your company always maintains healthy stock levels.

It is important to emphasize that the order point calculation must be performed individually for each SKU, as items have different sales volumes and may also come from different suppliers, each with specific lead times. And all this must be considered in the calculation.

In fact, there are three factors that must be considered:

1 – Safety stock: stock levels established to avoid stockouts;

2 – Replacement time: lead time or supplier supply time;

3 – Average consumption: the average daily consumption of the goods.

It is from these data that you will arrive at a number representing the minimum stock – the “red signal,” indicating the need to contact the supplier for a new replacement shipment. This minimum stored quantity ensures that your company is ready to meet demands until the replacement.

How to calculate the order point?

Now that we have defined what the order point is, shown its importance, and what needs to be considered, let’s understand how it is calculated. The formula is quite simple:

Order point = safety stock + (average consumption x delivery time)

Follow this practical example:

Imagine your company sells computer mice. Every day, 12 units of product from brand X are sold, and the supplier takes 5 days to send a new shipment to your warehouse. Considering that the minimum stock is 60 items, the reorder point calculation would be as follows:

Order point = 60 + (12 x 5) = 120

Therefore, every time your stock reaches 120 units of product, you must contact the supplier. In many cases, when there is no difference between delivery time and replenishment time, the reorder point will be double the quantity established as minimum stock.

WMS: Request the supplier at the right time

The great advantage of having specific software for warehouse management, such as WMS, is that the system itself automatically calculates the replenishment points. By recording all movements made, the WMS has enough data to calculate the replacement time in real-time.

Warehouse automation with WMS thus gives you the assurance that the purchase order to the supplier will be made at the exact moment the stock reaches the order point. Otherwise, if you have the reorder point number but do not have mechanisms to monitor the stock level, it will be difficult to identify the replenishment moment.

The best thing about WMS is that the system issues notifications that immediately reach you and your team, so the purchase order is quickly approved and forwarded to the supplier. Depending on the situation, if approval is not required, you can program the software to automatically send a purchase order. This helps your company always maintain ideal stock levels.

It is worth emphasizing that the system assists in many other aspects that ensure excellence in stock control, such as performing cyclic inventories, controlling and tracking movements, but also providing real-time data (Visual Management).

In this sense, we reiterate the importance of calculating the order point, but remember that relying on technology is an important step to succeed in managing your warehouse!


Order point: what it is and how to calculate it Deagor WMS per ecommerce può aiutarti!


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