By contrast, ordering stock too soon is detrimental because you have to store that stock, which increases your holding costs. Let’s say a manufacturer used 10 units of a component on their busiest day of production. The longest time it would take the supplier to deliver this component is 15 days. And let’s assume that the average daily use is 1.5 units, and the average lead time is 12 days. Average delivery lead time is the average amount of time it takes for a shipment to arrive from the time the order was placed.

Manufacturing companies should regularly review and update their reorder points based on changes in demand, lead times, service level objectives, and any other relevant factors. This proactive approach ensures that the reorder point remains aligned with the business’s evolving needs. When you use data what is rop in business to forecast demand, you can set informed reorder points so you aren’t left without inventory during times of increased customer demand. The more you calculate ROP for each product, the more accurately you can forecast demand in the future and ensure you use the reorder quantity formula correctly.

Short turnaround time

If you avoid reordering products at the right time, your customers can reduce the potential revenue. Keeping the safety stock can also avoid increasing demand during the peak season. Calculating ROP for each product can be time-consuming and challenging, especially if your inventory is patched together from several suppliers or you sell lots of products.

If you get confused too, the upcoming section will free you from that confusion. Managing your inventory is an important part of any product-based business. Let’s continue with the manufacturer example and calculate the reorder point. Rakesh Patel, author of two defining books on reverse geotagging, is a trusted authority in routing and logistics. His innovative solutions at Upper Route Planner have simplified logistics for businesses across the board. A thought leader in the field, Rakesh’s insights are shaping the future of modern-day logistics, making him your go-to expert for all things route optimization.

Average daily sales

So, what is the best way to solve stock issues and determine the right time to order stock? For Supplier B, your reorder point will be higher because you need to account for more stock days between your order and when new stock arrives. You source the shirt from Supplier B, who has a typical lead time of 7 days. When establishing a reorder point, you want to avoid repeatedly pulling from your safety stock.