Reorder Point: Definition, Benefits, and Its Function in Warehouse Management

Basically, reorder point is one of the inventory management strategies with the main goal of minimizing or reducing the risk of stockouts.

By calculating the reorder point accurately, you no longer need to worry about stockpiling items in the warehouse due to overordering, or disappointing customers because of running out of stock.

A well-calculated reorder point will make your purchasing process smoother and free from worry.

Definition of Reorder Point in Warehouse Management

The complete definition of reorder point is a specific threshold at which the inventory of a certain item in the warehouse must be replenished before it runs out.

Most early business owners rely solely on their instincts when deciding to restock their products. When they see an increase in product demand, they will immediately increase the inventory in the warehouse. Conversely, when demand is low, they will skip reordering because there’s still plenty of stock in storage.

For more experienced businesses, they tend to stockpile products in anticipation of high seasons or certain times of the year, such as Christmas, Eid, winter, rainy season, or New Year. The principle is simple: whether the products sell out or not is not a big issue, as long as they’ve fulfilled their sales targets.

However, for certain types of products, this approach can result in a buildup of dead stock or expired goods. So, the question becomes: when is the best time to reorder the items?

The more accurate way to determine the number of items to be ordered from suppliers, and when exactly to reorder is by using the reorder point formula.

How to Calculate Reorder Point (ROP)

When determining the reorder point, company owners can't just guess. A specific method is required using a particular formula. The reorder point formula is:

Reorder point = lead time demand + safety stock

Lead time is the time span between placing an order and the goods arriving in the hands of the customer. Meanwhile, lead time demand, which is typically part of the reorder point, refers to the estimated demand during that time span.

The length of the reorder point period will heavily depend on product quantity, item complexity, location, and other factors.

Safety stock is the additional quantity of inventory kept by the company to anticipate potential spikes in demand or longer delivery times.

The Importance of Reorder Point (ROP)

Why is reorder point such an important aspect of smooth business operations? Because using the reorder point formula brings several benefits, such as reducing inventory costs and improving customer satisfaction.

Additionally, using the reorder point method enables companies to maintain sufficient stock to meet customer demand and ensure timely delivery of orders.

It also helps businesses avoid excess inventory in the warehouse, which can lead to extra storage costs and automatically reduce profit margins.

Benefits of Applying Reorder Point (ROP) in Warehouse Management

Reorder Point (ROP) offers the following advantages:

1. One of the main benefits of this system is that it enables a smooth inventory flow with no interruptions. This further promotes inventory discipline in your business.

2. ROP creates room to identify procurement issues and helps resolve them, leading to smoother processes.

3. Ensures that stock is available and thus avoids production disruptions.

4. Unnecessary expenses related to storing and maintaining excess inventory are reduced.

5. ROP helps businesses make better decisions by supporting the tracking of the entire procurement process.

Implementing Reorder Point in Warehouse Management with Prieds WMS

To meet various market demands, companies need to maintain just the right amount of inventory, not too much and not too little. Having excess stock can lead to issues such as increased storage costs or the possibility of dead stock. And the opposite is equally problematic.

That’s why, to maintain stock levels that match market demand, companies can apply Reorder Point calculations in their warehouse management. To get accurate Reorder Point results, implementation of a Warehouse Management System (WMS) is key.

As a customizable WMS provider tailored to business needs, Prieds Technology offers a solution for efficient warehouse management through the integration of hardware and software. Various features offered by Prieds WMS help businesses manage their warehouse inventory—from calculating raw material procurement, optimizing storage space, to accurately calculating the reorder point based on business needs.

You can learn more about reorder points and warehouse management in your company through a consultation with Prieds' expert team. Get a WMS system with top-notch security and user-friendly features tailored to your company’s needs.