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Inventory Systems · 3 min readReorder Points Explained for Small Businesses
Reorder points explained simply: the stock level that tells you when to order, how to calculate it, and how to avoid both stock-outs and overstock.
A reorder point is the stock level at which you should place a new order, so that new goods arrive before the old ones run out. You calculate it from how fast you sell and how long your supplier takes. This post shows the method with a simple example.
The basic formula
Reorder point = (average daily sales x lead time in days) + safety stock
Three pieces:
- Average daily sales. How many you sell on a typical day.
- Lead time. Days from placing the order to having the goods ready to sell.
- Safety stock. A cushion for surprises.
A worked example
This is an example with made-up numbers, to show the method.
Say you sell about 4 mugs a day. Your supplier takes 10 days to deliver. You want a cushion of 12 mugs.
- During the wait you sell 4 x 10 = 40 mugs.
- Add the cushion of 12.
- Reorder point = 52.
When your count drops to 52, you order. If all goes as planned, the new batch arrives just as you reach about 12, and your cushion is untouched.
How to find your numbers
Average daily sales. Look at the last few weeks or months of sales for the item. Add up the units and divide by the number of days. If sales are uneven, use a longer period, and think about whether recent weeks were unusual.
Lead time. Check past orders. Count the days from order to arrival. Use the typical time, then note how late the worst delivery was.
Safety stock. A rough way is to take the extra days you might be unlucky and multiply by daily sales. If deliveries are sometimes three days late, a cushion of three days of sales is a sensible start. Raise it for items you cannot afford to miss, and lower it for items that are easy to substitute.
How much to order
The reorder point says when. A second question is how much. Think about:
- the supplier's minimum order
- discounts for larger batches
- storage space
- shelf life or fashion risk
- how much cash you want to tie up
A common simple rule is to order enough to cover a set number of weeks of sales. Start there and adjust.
Things that change the numbers
- Seasons and events. Sales of some items double at certain times. Raise the level before them.
- Promotions. A discount boosts sales, so plan ahead.
- Slow suppliers. If lead time grows, the reorder point must grow too.
- New products. You have no history, so start cautiously and review often.
- Several locations. Each place needs its own level. See managing inventory across locations.
Where reorder points go wrong
- Bad counts. If the shelf and system disagree, the alert fires too late or too early. Regular cycle counts fix this.
- Set and forget. Levels need a review every few months.
- One level for everything. Fast and slow items need different cushions.
- Ignoring open orders. If an order is already on its way, do not order again.
Let a system watch for you
You can write reorder points in a sheet and check them by hand. It works for a small range, but you must remember to look. A stock system can store a level for each item and send an alert the moment it is hit. That is one of the biggest wins of software; read more in how to avoid running out of stock.
Start with your top 20
You do not need to calculate for every product today. Pick your 20 most important items, work out their numbers, and set alerts. Once that is calm, add more.
A short checklist
- List your top sellers.
- Find daily sales for each.
- Note the supplier lead time.
- Choose a safety cushion.
- Calculate and record the reorder point.
- Set an alert.
- Review every few months.
How Social Buzz can help
We build inventory systems that store a reorder level for each item, alert you when it is reached, and can even draft the purchase order. We help you set sensible starting numbers from your own sales history. Learn more on our inventory systems page or email info@social-buzz.app.
Questions people ask
What is a reorder point?
A reorder point is the stock level at which you place a new order. It is set so that new stock arrives before the old stock runs out.
How do I calculate a reorder point?
Multiply your average daily sales by the supplier lead time in days, then add safety stock. The result is the number to reorder at.
What is lead time?
Lead time is the number of days between placing an order and having the goods on your shelf.
How often should I update reorder points?
Review them every few months, and whenever sales speed or supplier delivery times change. Seasonal items may need different levels in different months.
Know what you have, where it is, and when to reorder.
We set up or build inventory systems that track stock across shelves, stores and online shops. Barcodes, low-stock alerts and simple reports replace guesswork and messy spreadsheets.
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