The reorder level (or reorder point) tells businesses when to order more stock. It helps avoid running out of products while also preventing extra storage costs. Managing this well keeps your business running smoothly and your customers happy.
For small businesses, keeping track of inventory is a must. Too little stock can lead to missed sales, while too much can waste money. Finding the right balance helps businesses stay efficient and profitable.
Key Benefits:
Better Inventory Control – You order just the right amount of stock.
Happy Customers – Always having products available builds trust.
Cost Savings – You avoid excess storage and insurance costs.
Smarter Purchasing – You plan better, avoiding last-minute orders and higher costs.
To set the right reorder level, businesses need to analyze sales patterns, supplier reliability, and demand fluctuations. This ensures they always have enough stock without over-ordering. Below are detailed explanations of the key factors to consider:
1. Check Past Sales Trends
Reviewing historical sales data helps businesses understand how fast products sell. By analyzing daily, weekly, or monthly sales trends, businesses can predict future demand more accurately. If a product has a consistent sales pattern, setting its reorder level becomes easier. However, if sales fluctuate, businesses need to plan for variations and potential spikes in demand.
Example: A clothing store sees that winter jackets sell quickly in November and December. So, they set a higher reorder level during these months.
2. Know Your Supplier’s Lead Time
Lead time is the period between placing an order and receiving the stock. If a supplier takes longer to deliver, businesses need to reorder earlier to avoid stockouts. Lead time can vary based on supplier location, production capacity, and shipping methods.
Accounting for potential delays is also important because of supply chain disruptions, holidays, or unexpected demand surges. Businesses that work with multiple suppliers may experience different lead times for different products.
Example: A furniture store orders custom-made tables from a supplier that takes 4 weeks to deliver. If they sell 10 tables per week, they should reorder when they have at least 40 tables in stock.
3. Adjust for Seasonal Changes
Some products have seasonal demand spikes. Businesses should change their reorder levels to avoid running out of stock during busy times. This also helps prevent having too much stock during slow periods.
Analyzing seasonal trends from previous years helps in making informed inventory decisions. Businesses should prepare for unexpected demand shifts caused by changing customer preferences, market trends, or weather conditions.
Example: An ice cream vendor sells more in summer. They set a higher reorder level from March to June. In winter, they set a lower level.
4. Keep Emergency Stock (Safety Stock)
Safety stock is extra inventory that helps businesses deal with unexpected situations. This includes sudden demand increases, supplier delays, or damaged shipments. Without safety stock, businesses risk running out of products, which can lead to missed sales and dissatisfied customers.
The amount of safety stock required depends on demand variability, supplier reliability, and industry standards. Businesses should check their safety stock levels often. This helps make sure they are not too high, which ties up cash in extra inventory. It also ensures they are not too low, which can cause stockouts.
Example: A pharmacy keeps extra stocks of essential medicines because unexpected health issues can cause sudden demand increases.
