If you sell products online, having the right amount of inventory on hand is crucial for your business. You want to avoid stockouts where customers can't purchase an item because it's out of stock. But you also don't want to overstock and get stuck with excess inventory. This is where setting reorder levels comes in handy.
What is a Reorder Level?
A reorder level is the minimum inventory quantity that triggers you to place a new order with your vendor or supplier. For example, if you've set a reorder level of 50 units for a product, you'll know to reorder more once your on-hand inventory drops to 50 or below.
The reorder level aims to ensure you don't run out of stock before new inventory arrives. It accounts for the lead time it takes to receive an order from your supplier. It also provides a buffer in case customer demand unexpectedly spikes for an item.
How Reorder Levels Work for Ecommerce
In ecommerce, you can set reorder levels for each product you sell through your online store. Here are some tips on using reorder levels effectively:
- Base the reorder level on average sales velocity - how fast a product sells on average over time. Make sure it covers the lead time to get new stock.
- Adjust seasonally - increase reorder levels before peak sales times like holidays or summer vacation season.
- Factor in supply variability - does this product often have shipping delays or sourcing issues? A higher reorder level protects against unpredictable fulfillment.
- Account for promotions or sales - if an item will be discounted or marketed heavily, plan for higher than normal demand.
- Update levels periodically - sales trends change over time. Review and adjust reorder levels every few months.
Calculating Optimal Reorder Levels
Figuring out the ideal reorder level requires some data analysis and calculations. Here are the basic steps:
- Determine average daily unit sales for the product based on historical sales data.
- Estimate the product's lead time - the typical number of days it takes to receive an order from your supplier.
- Multiply daily unit sales by lead time to calculate the base reorder level.
- Adjust for other factors: seasonality, supply variability, upcoming promotions, etc.
- Set the final reorder level and enter it into your inventory management system.
- Regularly review and update levels as sales trends evolve.
Things to Keep in Mind
When managing reorder levels, here are some additional tips:
- Set different levels for fast versus slow-moving items. Faster sellers need higher levels.
- Consider economic order quantity (EOQ) - ordering in bulk units can lower costs but results in higher inventory.
- Weigh the costs of backorders vs. carrying extra stock - allow backorders for low-cost items.
- Use safety stock for mission-critical or high-demand products to avoid stockouts.
Properly set reorder levels help ecommerce businesses optimize inventory availability while avoiding excess stock that eats into profits. Adjusting levels based on current sales data and trends takes some work but pays off in the long run.