Fishbowl Inventory will tell you the formulas for Reorder Points are:
Reorder Point = (Lead Time + Safety Stock + Basic Stock) x Unit Sales Per Day
Order Up To Level = Reorder Point + (Order Interval x Unit Sales Per Day)
But there’s more you need to know: Reorder Point is NOT your Minimum Stock level
This is a common misunderstanding. Your reorder point is the level your stock is when you issue a Purchase Order to our vendor or in other words the point your stock is when you place your order. Your minimum stock level is the level your inventory is when you receive the shipment from your vendor.
Minimum Stock = Safety Stock + Basic Stock
Safety stock is the quantity of stock converted to days needed in case your vendor has a shortage. If you are a manufacturer, Safety Stock could be tied to a mid-level or finished good part. In that case, safety stock could represent the quantity needed in case a machine goes done in the plant or a key employee becomes scares. In essence, Safety Stock is to cover emergencies.
Basic Stock is the quantity of stock converted to days needed to cover the fluctuating market demands. This is not for season products. For products predictable affected by the seasons, consider resetting your reorder points each season.
For mid-sized companies I’ve worked with minimum stock is a necessity. For small companies I’ve worked with, unfortunately, minimum stock is often a luxury!
Fishbowl Inventory is a great resource for small and midsized manufacturing companies who use QuickBooks Pro, Premier or Enterprise. Click here to learn more!
Unit Sales Per Day also means Usage and/or Consumption per day
For manufacturing companies, in some cases a part can be consumed in house or sold directly to the customer. Both, a Manufacturing Order and a Sales Order can create demand for the same part. Therefore, Sales Per Day actually is referring to Sales + Consumption per day. Of course this number is usage per day averaged over a period of time determined by you.