Reorder Points for a Small Business: When to Order So You Never Run Out or Overstock

A shop selling motorcycle parts runs out of a common brake pad on a Tuesday. The supplier delivers in a week. For seven days the shop turns away around six customers a day, and several of them buy their oil and spark plugs elsewhere too. Meanwhile, on the same shelves, sit forty units of a mirror that sells twice a month, ordered in bulk because the price was good. The shop has too little of what sells and too much of what does not. A reorder point for each important item is the simplest cure for both.

The two costs

Running out.

• The sale is lost, and often the rest of the basket with it.
• The customer may not return.
• Rush orders cost more.

Holding too much.

• Cash sits on the shelf instead of in the bank.
• Space is taken.
• Goods expire, go out of fashion, get damaged or are stolen.

Ordering by feel tends to produce both at once: fear of running out leads to over-ordering whatever comes to mind, while the true best-sellers still run short.

The formula

Reorder point = (average daily sales × lead time in days) + safety stock

Three numbers.

Average daily sales. Units sold over a recent period, divided by the days. Use the last one to three months, and use the selling days if you are closed on some.

Lead time. The days from placing an order to having the goods on the shelf, ready to sell. Include the supplier's processing, shipping, and your own receiving. Use what actually happens, not what the supplier promises.

Safety stock. A buffer for the days when sales are higher or delivery is slower.

When stock on hand falls to the reorder point, order.

A worked example

The brake pad:

• Sold 300 units in the last 30 selling days: 10 a day.
• Supplier lead time: usually 7 days.
• Stock expected to sell while waiting: 10 × 7 = 70 units.

Without a buffer, the shop would order at 70 and arrive at zero exactly as the delivery comes, if everything goes to plan. It will not.

Safety stock. The busiest days sell 14. The slowest delivery in the past year took 10 days.

A simple method:

(busiest daily sales × longest lead time) − (average daily sales × average lead time) = (14 × 10) − (10 × 7) = 140 − 70 = 70 units.

That covers the case where both go wrong at once, which is cautious. For an item this important, the shop decides to hold 50.

Reorder point = 70 + 50 = 120 units.

When the count reaches 120, the order goes in.

How much to order

The reorder point says when. The order quantity is a separate decision.

A practical rule: order enough to cover a set number of weeks of sales, chosen by:

• Supplier minimums and pack sizes.
• Quantity discounts, weighed against the cash tied up.
• Delivery cost. Fewer, larger orders if freight is expensive.
• Shelf life and storage space.
• Cash. What you can afford to have sitting in stock.

For the brake pad: ordering four weeks of sales means 10 × 28 = 280 units, rounded to the supplier's carton size.

For fast items from a nearby supplier, order little and often. For slow items or distant suppliers, order more and less often.

A bulk discount is only a saving if the goods sell. Forty mirrors at 10 percent off, selling two a month, is twenty months of cash locked in a box.

Start with the items that matter

Do not calculate reorder points for a thousand items in a week.

1. List items by sales value over the past few months.
2. Take the top group, often the fifth of items that brings most of the sales. Set reorder points for these first.
3. Add items that are critical even if low in value: the thing customers always expect you to have.
4. For the long tail of slow items, use a simple rule: keep one or two, and reorder when one sells.

Twenty or thirty well-managed items remove most stockouts.

Using it without software

The two-bin method. Keep the stock in two containers. Sell from the first. The second holds exactly the reorder point quantity. When the first is empty and you open the second, order. No counting needed.

A card or tag. Place a marked card in the stack at the reorder point level. When you reach the card, it goes to whoever orders.

A weekly check. A list of the key items with their reorder points. Once or twice a week, someone compares shelf with list and orders what has fallen below.

A spreadsheet. Item, stock on hand, reorder point, order quantity, and a column that shows "ORDER" when stock is at or below the point.

All of these work. What matters is that the trigger is a number decided in advance, not a feeling.

Count what is already on order

Before ordering, check what you have already ordered and not yet received. The trigger should compare the reorder point with stock on hand plus stock on order. Otherwise an order placed on Monday is placed again on Wednesday, because the shelf still looks low.

Keep it current

A reorder point is right for the conditions when it was set.

Review monthly for key items. Recalculate average sales and check the lead time actually achieved.

Adjust for seasons. Before a known busy period, raise the daily sales figure and the safety stock. After it, lower them, or you will be left with the surplus.

Adjust for trends. An item whose sales are rising needs a higher point. One that is fading needs a lower one, then none.

Adjust for supplier changes. A new supplier, a new route or a holiday shutdown changes the lead time.

Adjust for promotions. Planning a discount? Order ahead of it.

Dealing with unreliable suppliers

Long or erratic lead times are the main reason for high safety stock.

• Measure each supplier's actual lead time and its variation.
• Order earlier from the unreliable ones.
• Keep a second supplier for critical items, even at a slightly higher price.
• Share your forecast with good suppliers, so they can prepare.
• Watch the calendar. Long holidays, when suppliers and couriers stop, need orders placed weeks ahead.

What to measure

• Stockouts: how many times a key item reached zero, and for how many days.
• Lost sales, noted when a customer asks for something you do not have.
• Stock value on hand, in total and for slow items.
• Days of stock: stock on hand divided by daily sales. An item with 200 days of stock is cash asleep.
• Dead stock: items with no sale in six months.

The aim is fewer stockouts on what sells and less cash in what does not.

Common mistakes

• Ordering when the shelf is empty. By then it is a week too late.
• Using the supplier's promised lead time instead of the real one.
• No safety stock, or the same safety stock for everything.
• Forgetting stock already on order.
• Setting the points once and never revisiting.
• Ignoring seasons.
• Buying in bulk for the discount without checking how long it will take to sell.
• Treating all items the same.
• Stock records that do not match the shelf. A reorder point is only as good as the count behind it.

Tools

The calculation needs sales per item over time and the stock on hand, both of which come from recording sales and purchases as they happen. Polynusa's bookkeeping records purchases and sales in one workspace, which gives you the sales history for these figures. See the pricing page.

Summary

For each important item, multiply average daily sales by the real lead time and add a safety stock sized to how bad a stockout would be. Order when stock on hand plus stock on order falls to that point, in a quantity that balances discounts, delivery cost and cash. Start with the items that bring most of the sales, use two bins or a weekly list if you have no software, and review the numbers monthly and before every busy season.

FAQ

What is a reorder point?

It is the stock level at which you place a new order, set so that the new stock arrives just before the old runs out. It equals the amount you expect to sell while waiting for delivery, plus a buffer called safety stock for when sales run higher or delivery runs later than usual.

How is a reorder point calculated?

Multiply average daily sales by the supplier's lead time in days, then add safety stock. If you sell 10 units a day, delivery takes 7 days and you keep 30 units as a buffer, the reorder point is 100. When stock falls to 100, order.

How much safety stock should a small business hold?

Enough to cover the realistic bad case, not the worst imaginable. A simple method is to take the difference between your busiest daily sales and your average, multiply by the longest lead time you have actually experienced, and adjust by how costly a stockout is for that item. Critical best-sellers get more, slow or easily substituted items get less.