What's the best way to set inventory levels and reorder points?

1 Inventory levels

Inventory levels are the amount of inventory you have available at any given time. They can be measured in units, value, or days of supply. Inventory levels depend on various factors, such as your sales forecast, lead time, customer demand, seasonality, and product lifecycle. Ideally, you want to keep your inventory levels as low as possible without compromising customer satisfaction or service level. Low inventory levels can reduce your storage costs, inventory holding costs, and obsolescence risks. However, if your inventory levels are too low, you may run out of stock and lose sales or damage your reputation.

2 Reorder points

Reorder points are the minimum inventory levels that trigger a new order from your supplier. They are calculated based on your lead time, average demand, and safety stock. Lead time is the time it takes for your supplier to deliver your order. Average demand is the expected sales or consumption of your product during the lead time. Safety stock is the extra inventory you keep to protect yourself from unexpected fluctuations in demand or supply. Reorder points help you avoid stockouts and maintain a consistent inventory flow. They also help you optimize your ordering frequency and quantity, which can affect your ordering costs and discounts.

3 Calculation methods

There are various methods to calculate inventory levels and reorder points, depending on the complexity and variability of your inventory situation. Economic order quantity (EOQ) is a common method that calculates the optimal order quantity to minimize total inventory costs. The reorder point formula, on the other hand, calculates the reorder point based on lead time, average demand, and safety stock. ABC analysis categorizes inventory items into three groups based on their value, frequency, and importance. Demand forecasting utilizes historical data, market trends, and statistical models to estimate future demand for products. All of these methods help you prioritize your inventory management efforts and allocate resources accordingly.

4 Inventory management tools

Calculating inventory levels and reorder points manually can be time-consuming and error-prone; however, there are various inventory management tools that can automate and simplify this process. These tools can integrate with your POS, accounting, and e-commerce systems to track your inventory in real time, generate reports and dashboards that show your inventory performance, alert you when your inventory levels are too high or too low, and use AI and ML to analyze your data and optimize your inventory decisions. Examples of such tools include TradeGecko, Inventory Planner, and inFlow. TradeGecko is a cloud-based platform that helps manage inventory across multiple channels, locations, and currencies. Inventory Planner is an online tool that helps forecast demand, set reorder points, and plan purchasing. Lastly, inFlow is a desktop and mobile app that helps manage inventory, orders, customers, and vendors.

5 Best practices

Setting inventory levels and reorder points is not a one-time task and should be monitored and updated regularly to reflect your current inventory situation and business goals. To ensure accuracy, you should review your inventory levels and reorder points at least once a month or every quarter, depending on your inventory turnover rate. Analyzing sales history, customer feedback, and market trends can help identify patterns, peaks, and dips in demand. Additionally, you can adjust your safety stock level based on desired service level, demand variability, and supplier reliability. Multiple sources of information and methods should be used to calculate inventory levels and reorder points for accuracy and consistency. Testing and evaluating different scenarios and assumptions can also help identify the best option for your business.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?