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Safety stock = 5 days x 200 bottles = 1000 bottles You keep enough excess stock for 5 days of sales, in case of unexpected delays. Your vendor takes one week to deliver each batch of perfumes you order. Suppose you’re a perfume retailer who sells 200 bottles of perfume every day. To calculate a reorder point with safety stock, multiply the daily average usage by the lead time and add the amount of safety stock you keep. This method is used by businesses that keep extra stock on hand in case of unexpected circumstances. Then we’ll cover how to handle reorder points when you have multiple vendors. Let’s look at how to calculate a reorder point both with and without safety stock. Safety stock: The amount of extra stock, if any, that you keep in your inventory to help avoid stockoutsĭaily average usage: The number of sales made in an average day of that particular item Reorder Point Formula Lead time: Time taken (in days) for your vendor to fulfill your order To calculate the ROP for each item, you’ll need to know the following parameters: You need to know when to order each item in your inventory separately, because different items have different sell-through rates. Setting a reorder point helps you optimize your inventory, replenish your stock of individual items at the right time, and meet your market demand without going out of stock. The your vendor takes to supply the items, the more sales you’ll be losing. If you order when you have zero stock on hand, you’ll be unable to make sales for as long as it takes to receive the order.

If you order when you still have a lot of stock on hand, it will lead to extra stock piling up, which will increase your holding costs.

If you’re a business owner, knowing when to order more stock is important. In other words, it tells you when to place an order so you won’t run out of stock. A reorder point (ROP) is a specific level at which your stock needs to be replenished.