Running out of a bestseller costs you sales and sometimes a customer. Ordering too much ties up cash in boxes that sit on a shelf. A reorder point is the simple rule that sits between the two: when stock falls to this level, place an order. Getting it roughly right matters more than getting it perfect, and the arithmetic is easy.
The basic formula
Reorder point = average daily demand × lead time in days + safety stock.
The first part covers what you expect to sell while you wait for the new stock to arrive. The safety stock covers the unexpected. Take a product that sells 20 units a day, with a supplier that delivers in 7 days, and a safety stock of 30 units. The reorder point is 20 × 7 + 30 = 170. When stock reaches 170, you order. By the time the delivery arrives, you will have sold about 140 units and still hold roughly 30 in reserve.
Working out daily demand
Use recent sales, not a guess. If you sold 840 units over the last six weeks, that is 42 days, so demand is 20 a day. Two cautions apply. If you ran out of stock for part of that period, sales understate demand, so adjust upwards or leave those days out. And if a promotion distorted the numbers, use a period without it or remove the spike. For seasonal products, use the same season last year, or a forecast, rather than last month's average.
Counting lead time honestly
Lead time is the whole wait from placing the order until the goods are on your shelf and ready to sell. It includes the supplier's processing and production time, shipping, customs if relevant, and the time it takes you to receive and check the delivery. Suppliers tend to quote the best case. A better figure is what you have really experienced over the last few orders. Our lead time calculator adds the stages up for you.
Choosing safety stock
Safety stock is insurance, and there is more than one way to size it. The simplest is to keep a few extra days of sales. At 20 a day, one and a half days is 30 units.
A more cautious method uses your worst cases: maximum daily demand times maximum lead time, minus average demand times average lead time. If the best month had 30 a day and your slowest delivery took 10 days, that is 300 − 140 = 160 units of safety stock. It is very safe, and also expensive, because it assumes both bad things happen together.
The statistical method balances the two. Safety stock = z × standard deviation of daily demand × the square root of lead time. If you want to be in stock about 95% of the time, z is roughly 1.65. With demand varying by about 6 units a day around the average and a 7-day lead time, the answer is 1.65 × 6 × 2.65, or about 26 units. It needs a record of your sales variation, but it ties the buffer to the service level you choose rather than to a gut feeling.
The cost of holding more
Extra stock is not free. It uses storage space, can be damaged or become obsolete, and ties up cash you could use elsewhere. Many businesses put the yearly cost of holding stock at a meaningful share of its value, so a larger buffer on a slow, expensive item deserves more thought than on a cheap fast mover. See our carrying cost calculator to put a number on it.
When to order is only half the question
The reorder point tells you when. The order quantity tells you how much. A classic approach is the economic order quantity, which balances the cost of placing orders against the cost of holding stock. At 7,300 units a year (20 a day), 50 per order and 2.50 to hold a unit for a year, EOQ = √(2 × 7,300 × 50 ÷ 2.50) ≈ 540 units, which means roughly 13 or 14 orders a year. Treat the result as a starting point and adjust it for supplier minimums, pack sizes and any quantity discounts. The EOQ calculator does the arithmetic.
Compare against what you actually have
A common trap is checking the reorder point against stock on the shelf only. If you ordered last week and the goods have not arrived, the shelf count is still low, and you may order again. Compare the reorder point with your inventory position: stock on hand plus anything already on order, minus anything promised to customers. That prevents double orders.
Two products, two rules
A fast mover and a slow one should not share a rule. The product that sells 20 a day with a 7-day lead time has a reorder point around 170. A slow item selling 2 a day with a 21-day lead time has a reorder point of 2 × 21 + 10 = 52. The slow one has a long supply line, so even a small daily demand needs a meaningful buffer, but the amounts of cash involved are very different. Sort your products into groups by sales and value, and spend your attention on the ones that matter most.
Mistakes to avoid
Setting the number once and never revisiting it is the most frequent one. Demand and lead times change, so review fast sellers monthly and the rest every quarter. Others include ignoring supplier minimum order quantities, using calendar days for demand and working days for lead time, and applying a single rule to every product. Your best sellers and your slowest items need different treatment.
Check the numbers with a tool
Try our reorder point calculator with your own figures, and use the weeks on hand calculator to see how long your current stock will last. This article is general information; your own sales data should guide the final numbers.
