inventory management

Reorder Points: Why You Need Them

We discuss why stock reorder points are important for small manufacturers and how you can calculate and track them to ensure you never run out of stock again.

Reorder points allow businesses – of all sizes, large and small – to stay better organized by monitoring the amount of items they have in stock and alerting them when they need to restock or order more.

This is especially useful for small manufacturers whose operations rely on a steady supply chain that can ensure the right materials are on hand exactly when they are required to be made into your products.

In this blog post, we’ll explain why implementing the concept of reorder points into your workflow could solve many of your raw material inventory management woes. Let’s dive in!

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Introducing Reorder Points

If you think you may have heard the phrase “reorder point” and dismissed it as some kind of large manufacturer jargon that you don’t need to know about, it’s time to change things up a bit. This concept is much easier than you think.

Reorder points are essentially the minimum level of stock you need to have on hand before you need to consider placing another order.

So, why is it important to know your reorder points? It helps you avoid stockouts and ensures you always have enough inventory on hand to fill customer orders. Reorder points are especially crucial for products with high demand or long lead times, as running out of stock can result in lost sales and dissatisfied customers (goodbye, Etsy star seller rating!).

Setting up reorder points allows you to streamline your inventory management system and keep your business running smoothly. So, whether you’re a small business owner or a seasoned inventory manager, it’s time to get familiar with reorder points!

Common Reorder Point Pitfalls

When it comes to managing inventory, determining the right reorder point is crucial.

One of the biggest pitfalls is relying solely on historical sales data to set the reorder point. While this can be a helpful starting point, it’s important to also take into account current market trends, seasonal fluctuations, and any upcoming promotions or sales as this can really impact on your available stock levels.

Another pitfall to avoid is being too conservative with the reorder point, which can result in missed opportunities to capitalize on high demand: if you don’t have the materials on hand for unexpected sales, you can quickly fall behind with your manufacturing and fulfilment.

On the other hand, having reorder points that are too high can result in carrying unnecessarily large amounts of material inventory, which can really tie up your cashflow.

It might take a bit of experimentation to get your reorder points right, but by regularly reviewing and adjusting the reorder point based on a variety of factors, businesses can achieve a more efficient and effective inventory management strategy.

The Benefits of calculating reorder points

Let’s take a look at some ways your small maker business will level up when you implement reorder points:

  • By setting a minimum inventory level, you can be sure that you’ll always have enough supplies on hand, without overbuying and tying up valuable cash flow.
  • Reorder points also help you avoid stockouts, which can cause delays in production and disappoint customers.
  • Attempting to calculate your reorder points leads you to creating good inventory tracking habits and implementing systems for keeping control of your stock levels.

How to calculate your reorder points

Now that we know the basics of reorder points, let’s talk about how to actually calculate them. Calculating your reorder points is an involved process that requires you to take into account a couple of different variables, be prepared to not get this 100% correct at the start, it’s often a process of refinement rather than a one-shot task.

First off, you’ll need to create separate reorder points for each material or item in your inventory as they will all naturally differ in the points where you’ll need to reorder them.

One major factor to calculating a reorder point is determining on how long it takes you to obtain the item from your suppliers. You’ll want to look back on your past purchases and calculate the time that elapsed in days between the time you placed the order and when it was delivered to your workshop or storeroom. This timeframe is usually also known as your lead time.

If you have multiple suppliers, then you’ll need to take a look at taking the average or median lead time between all. If they differ substantially (i.e. there is a situation where you purchase some from overseas and some in person down the road) then you might be best to keep seperate reorder points for each supplier.

Safety stock is an important consideration when it comes to calculating your perfect reorder point. Safety stock is the amount of inventory you keep on hand in addition to the reorder point to help protect against unexpected spikes or drops in demand, as well as supply chain issues.

A good rule of thumb for calculating safety stock levels is to use the formula:

Lead Time x Average Daily Usage + Desired Buffer.

Lead time is the amount of time it takes your supplier to fulfill an order, and average daily usage is the amount you usually use in a day. The desired buffer would be whatever number you choose as a cushion for unexpected demand or supply chain issues.

You’ll also need to factor in demand patterns that are specific to each item or material. For example, if you manufacture seasonal items that are in high demand at certain times of the year, it’s important to set your reorder points accordingly.

Another point of consideration is to factor in upcoming promotions or sales. By having extra stock on hand before a promotion, you can ensure that your customers won’t be disappointed by running out of the featured items.

Don’t be afraid to adjust your reorder points over time as demand and other factors change - in fact, it’s best to build in a process where you are assessing your reorder points at least annually.

By utilizing your reorder points in the most effective way possible, you’ll be able to ensure a smooth, steady flow of inventory that keeps your business thriving.

How to track and action your reorder points

Now that you know how to calculate your reorder points, let’s discuss the process for tracking and acting on them.

While it is certainly possible to use a spreadsheet like Excel to track your reorder points, once you get to a certain size it’s usually the case that these systems become unwieldy and impossible to keep updated.

Many small makers at this stage upgrade to an Inventory Management System - these automated systems are invaluable for keeping an eye on your stock levels and helping you stay organized. An inventory tracking system can track your reorder points, notify you when it’s time to order more supplies, and also alert you if a particular item is running low.

Another tip for successful inventory management is to automate your ordering process as much as possible so you don’t miss any opportunities to restock when the time comes. Using flow automation software (such as Zapier) to listen for stock changes and then place orders directly with your suppliers can really help with tasks that typically take a lot of time to arrange.

Finally, be sure to stay on top of your inventory tracking and regularly review your reorder points to make sure they are still relevant. Keeping a close eye on the current market trends and any upcoming promotions or sales that may influence demand can help you ensure that you’re always well-prepared when it comes to managing your inventory.

By taking the time to assess and adjust your reorder points regularly, you can be sure that your small maker business is always taking advantage of the best inventory management strategy for your unique needs.

Using Craftybase to keep track of your reorder points (for fun and for profit!)

As a small maker, running a successful business can be challenging. Not only do you need to create high-quality products, but you must also manage your inventory efficiently to ensure profitability and make sure you can keep up with demand.

As we have seen, calculating reorder points can be time-consuming and confusing, especially if you’re new to the game. This is where Craftybase comes in.

Craftybase is a raw material inventory management software designed specifically for small makers who want to keep track of their material and product stock levels and reorder points.

With its user-friendly interface and powerful features, Craftybase makes it easy to manage your inventory, so you can focus on what you do best - creating beautiful products to sell. Try us for free today!

Nicole Pascoe Nicole Pascoe - Profile

Written by Nicole Pascoe

Nicole is the co-founder of Craftybase, inventory and manufacturing software designed for small manufacturers. She has been working with, and writing articles for, small manufacturing businesses for the last 12 years. Her passion is to help makers to become more successful with their online endeavors by empowering them with the knowledge they need to take their business to the next level.