When you think of stock management, you might think of counting incoming inventory items and stacking products on shelves. While these efforts are parts of the process, effectively managing your inventory levels goes far beyond organizing boxes.
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Setting minimum and maximum reorder levels gives you greater control over your product assortment. You’ll know the precise reorder point for each item and the order quantity necessary to keep your business running smoothly. In this article, learn about min/max reorder levels and how they’re used to optimize your order management process.
What Are Min/Max (PAR) Levels?
Min/max levels, also known as periodic automatic replenishment (PAR) levels, are the smallest and largest stock quantities you set for items. These levels serve as benchmarks to guide your inventory management and ensure you have the right amount of product on hand. They also minimize the chance that you’ll have excess stock on hand.
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Your minimum order level is the lowest amount of inventory your company needs available for a product. Your maximum order level is the greatest number of items you keep on hand without needlessly increasing your costs or risk carrying extra inventory.
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PAR levels are especially important if you frequently deal with demand fluctuations, such as during the holiday season or when big events come to town. Min/max levels are also essential if your business creates or sells perishable goods in the food and beverage, beauty, or hospitality industries.
What Are Reorder Levels And Reorder Quantities?
A product’s reorder level, also known as its reorder point, is the stock quantity at which you should order more items. It represents the minimum stock levels for your inventory. Ordering more once you hit this point ensures that your business continues running without disruption.Â
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The amount of product needed to replenish stock once you reach your reorder point is called the reorder quantity. For example, let’s say your business sells custom t-shirts with a reorder point of 200 shirts and a reorder quantity of 1,000 shirts. This simply means that, once you have 200 shirts left in stock, you need to place an order of 1,000 shirts, bringing the total number of shirts in stock to 1,200.
Why Are Min/Max Levels Essential?
1. Preventing stockouts
A stockout occurs when a business runs out of inventory and can no longer meet customer demand. Customers are often unwilling to endure delays and will seek alternatives elsewhere.
When you establish and maintain minimum stock levels and reorder quantities, you ensure that your business always has a baseline quantity of products available. This significantly reduces the risk of depleting your inventory or running out of items altogether. Your customers trust that you’ll have the products they want when they shop with you.
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For five more strategies that prevent stockouts, read our blog and better manage inventory levels.Â
2. Optimizing storage
Contrary to a stockout, overstocking happens when you have extra inventory on hand. This extra stock occupies valuable space and leads to additional carrying costs. By establishing maximum inventory levels, you set clear upper thresholds and curb overstocking. This minimizes storage and inventory costs and gives you ample room to store all your stock properly.
3. Maximizing profits
Setting maximum inventory levels prevents wasteful spending that results in goods sitting in storage. Well-defined minimum reorder points help control and potentially eliminate extra expenses like expedited shipping fees tacked onto last-minute orders. With PAR levels in place, you cut costs and thus boost your profits.
4. Enhancing customer satisfaction
Failing to meet customer demands due to insufficient stock poses a substantial risk to customer retention. The potential of lost sales due to dissatisfied customers impacts your enterprise’s long-term viability. Setting reorder stock levels ensures you have a consistent supply of products to meet your customers’ expectations.
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For example, suppose a shopper visits your e-commerce site to stock up on their favorite face mask. If you’ve established clear PAR levels, this shopper will always find their favorite face mask in stock — and, more importantly, know that you have it available. This reliability enhances your customers’ shopping experience since you’re fulfilling their immediate needs, thereby building trust and brand loyalty.
What Affects Your Reorder Levels?
Demand
Storage space
The amount of storage space available in your shop or warehouse directly affects how much inventory you’re able to order. If your business operates with limited warehouse space, the range between your minimum and maximum levels is likely fairly tight. On the other hand, a business with plenty of storage space might have max levels significantly higher than its min levels.
Safety stock
Your safety stock is the product you hold in case your inventory runs low and you need to fulfill orders while you await the arrival of new items. This is kept separate from the inventory set by min/max levels. If you find yourself regularly pulling inventory from this supply, you should increase your safety stock level.
Lead time
Lead time is the number of days it takes for you to receive an order from your vendor after placing it. Longer lead times require higher reorder levels, or reorder quantities, to ensure you have enough inventory during the waiting period. For example, if you sell handmade tote bags, you might need to account for the extended lead times associated with artisanal craftsmanship and the extra supplies you need to make your items.
How To Set Your Min/Max Levels
1. Look at sales reporting
Your sales reports are a key starting point for setting an effective minimum level and maximum level. Historical data gives you clear insights into your average daily sales volume alongside peak seasons, sales trends, and variations in demand.Â
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For example, your reporting may show that you sell significantly fewer sprinkler systems during the winter than in the summertime. You might then decide to set a lower reorder point during the cooler months than in the warmer months.
2. Look at your dead inventory report
Dead inventory comprises the products you don’t expect to sell, and a dead inventory report accounts for all products that fall into this category. Analyze your report to pinpoint products with sluggish sales. This way, you’ll better identify potential slow-moving items among your current offerings and lower their minimum reorder levels. An inventory management system can help with this.
How To Calculate Reorder Points Using Min/Max Levels
To calculate a product’s minimum reorder level, multiply the product’s average demand (the average daily sales, but you can also use weekly or monthly sales) by its average lead time. Then, add this sum to the amount of safety stock you keep on hand. The result is your minimum reorder point for that product. As a formula, this relationship is expressed as follows:
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Minimum reorder level = (daily, weekly, or monthly sales or usage * average lead time) + safety stock
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Maximum stock levels vary a bit but are typically set between 1.5 and two times your reorder point. As a formula:
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Maximum reorder level = minimum reorder level * 1.5Â
OR
Maximum reorder level = minimum reorder level * 2
OR any value between these two figures
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Consider this example: You own a bakery, and you want to calculate the reorder point for sugar in your inventory. You’ve set a safety stock level of 20 pounds of sugar. You use an average of five pounds of sugar every day, with an average lead time of about four days. With this in mind, you plug the numbers into the reorder point formula: (5 pounds * 4 days) + 20. This comes out to 40 pounds of sugar, so when your supply of sugar falls to 40 pounds, it’s time to order more.
How To Use The Reorder Quantity Formula
To use the reorder quantity formula for a product, you multiply the product’s average demand by its average lead time.
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Reorder quantity = daily, weekly, or monthly sales or usage * average lead time
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In the previous example, you need five pounds of sugar on a daily basis and have a lead time of four days. As such, your reorder quantity is 5 pounds * 4 days, which equals 20 pounds of sugar. Keep in mind that if you dip into your safety stock, you need to replenish it when you order your next batch as well.
How To Optimize Your Order Management Strategy With Min/Max Levels
Reorder points aren’t suggestions to start thinking about ordering more inventory. They’re reminders that it’s time to submit a purchase order for more products to keep things running smoothly. Consistently taking action when you hit your reorder points is crucial to executing a successful order management strategy.
For example, say you’ve reached the reorder point for the clay that you use to make your ceramic vases. This signals that it’s time to order more clay now and not at the end of the week. This immediacy prevents you from dipping into your safety stock and reduces the chances of facing supply chain disruptions from ordering delays.
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When you use the reorder level formula, leverage your knowledge of your business and its dynamics to calculate levels tailored to your unique needs. You may feel intuitively that higher reorder levels than what the formula gives you are necessary, and that’s okay. Just don’t set a reorder level below what the formula yields.
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Inventory management software is a great tool to maximize the effectiveness of your reorder points. The best inventory management systems notify you when it’s time to replenish your inventory based on your calculated reorder points. They also automatically generate purchase orders, manage supplier information, and streamline supply chain management. This means you’ll focus less on poring over your inventory and more on finding new ways to sell it.
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Thrive keeps your shelves stocked with the products your customers are excited for with tools that make ordering at scale easy.
Best Practices For Optimizing Order Management Via PAR Levels
1. Conduct audits and readjust before busy seasons
When you’re expecting high seasonal demand, it’s time to evaluate and fine-tune your PAR levels. Consider adjusting your optimal order quantity to prevent stockouts during peak periods while avoiding excess inventory when demand slows.
2. Tailor min/max levels to different locations
If you manage multiple locations or sales channels, avoid setting uniform PAR levels for all locations or avenues. Instead, consider each storefront’s customer preferences to adequately meet demand.Â
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For example, suppose you run a cafe with two locations and you sell your best-selling roasts on your website. Caramel macchiatos are a favorite at one spot, chai tea lattes are a big hit at the other shop, and your dark roast sells like hotcakes through e-commerce. To accommodate these differences in demand, establish distinct reorder points and reorder quantities for caramel sauce and black tea at each location, while eyeing your dark roast stock level to adequately supply online and in-store orders.
3. Regularly review PAR levels
Assessments on a monthly or quarterly basis allow you to align your PAR-level inventory with evolving customer preferences and market dynamics. For example, conducting cycle counts is a great way to consistently keep tallies of your inventory and ensure accurate reorder points. This approach also gives you a point of comparison to determine how well your PAR levels are catering to your business’s inventory needs.
Maximizing Your Inventory Efforts
Effectively managing your inventory might initially appear to be an intricate process, but with the right tools, strategies, and formulas, it’s a cakewalk. With properly calculated reorder points and reorder quantities, you ensure an excellent shopping experience for shoppers every time. After all, the products you sell are what keep customers returning to your business.
