The question a reorder point answers
At some point every seller asks: when do I place the next order? Order too late and you run out while waiting for delivery, losing sales and disappointing customers. Order too early or too much and money sits on shelves, risking overstock.
A reorder point turns this into a rule. It is the stock level at which you place a new order, so that new goods arrive just before the current stock runs out. It depends on two things you can measure: how fast you sell and how long the supplier takes to deliver.
The ingredients
Daily (or weekly) sales pace. The average number of units you sell per day. Use real sales history, ideally from a period that reflects normal demand. If sales are seasonal, use a figure for the relevant season, not an annual average.
Lead time. The number of days between placing an order and having the goods ready to sell. Include everything: the supplier’s preparation time, transit, and the time to receive and check the delivery. Accurate lead times are one of the things worth confirming during supplier vetting.
Safety stock. An extra buffer that protects against the unexpected: a late shipment or a week when sales run higher than usual. Neither lead time nor demand is perfectly predictable, so a buffer keeps ordinary variation from becoming a stock-out.
The basic formula
Reorder point = (average daily sales × lead time in days) + safety stock
The first part is the stock you expect to sell while waiting for the order. The safety stock covers what you cannot predict.
A hypothetical example
These numbers are invented for illustration only.
Suppose a product sells an average of 6 units per day, and the supplier takes about 10 days to deliver on average.
- Expected demand during lead time: 6 × 10 = 60 units.
Now consider the worst cases you have seen. Say that on your busiest days you sold up to 9 units, and the longest delivery you have experienced was 14 days.
- Worst-case demand during a long wait: 9 × 14 = 126 units.
- The difference between that and the average case: 126 − 60 = 66 units.
Using the whole difference as safety stock is very cautious, since the worst sales pace and the longest delay rarely happen together. Many sellers choose a smaller buffer that suits how costly a stock-out would be. Suppose you decide on 30 units.
- Reorder point = 60 + 30 = 90 units.
With this rule, when stock falls to 90 units you place a new order. If all goes to plan, you sell about 60 units during the 10-day wait and still hold about 30 when the delivery arrives. If delivery is a few days late, or sales run higher, the buffer absorbs it.
Choosing a safety stock level
There is no single right amount. Consider:
- How costly is running out? For a best seller or a product that customers cannot easily replace, a larger buffer makes sense. For a low-value item, a smaller one will do.
- How reliable is the supplier? Inconsistent lead times call for more buffer. A supplier who delivers on schedule allows a smaller one.
- How steady is demand? Sales that swing widely need more cushion than steady sales.
- What does holding stock cost? Extra units tie up cash and storage space, and risk becoming dead stock. A buffer is a trade-off, not a free insurance policy. Watch your cash flow when sizing it.
Start with a modest buffer, track how often you actually dip into it, and adjust. If you never touch it, it may be too large. If you often run out anyway, it is too small, or your lead time estimate is off.
How much to order
The reorder point tells you when, not how much. Order quantity depends on minimum order sizes, bulk pricing, storage space, shelf life and how much cash you can commit. Larger orders may lower the unit price but increase the risk of unsold stock, a trade-off that comes up often in wholesale buying. Many small sellers cover roughly a set number of weeks of expected sales per order, and adjust as they learn.
Keeping the inputs current
A reorder point is only as good as its inputs, so revisit them regularly.
- Update sales pace when demand changes, such as after a promotion, a season shift or a change in advertising.
- Re-check lead time after every delivery by recording the date ordered and the date received.
- Keep stock counts right. If your records are inaccurate, the rule will fire at the wrong time. The habits in the article on inventory tracking apply here.
- Think about stock already on order. Count units that are on their way, so you do not reorder twice for the same gap.
Limits of the method
The formula works best for products with reasonably steady sales. New products with no history, items with sharp seasonal swings, or goods with one-time launches need judgment rather than a formula, and small first orders can reduce risk. Forecasts can be wrong, so treat the result as a guide that you keep refining.