Running out of your best-selling product during peak season isn't just frustrating—it's expensive. Lost sales, disappointed customers, and scrambling to expedite orders all eat into your margins. The solution sounds simple: reorder before you run out. But figuring out exactly when to reorder? That's where most brands get stuck.
Here's the thing: reorder points aren't magic numbers you set once and forget. They're calculated values based on your specific demand patterns, supplier lead times, and how much risk you're willing to accept. Get them right, and inventory practically manages itself. Get them wrong, and you're either constantly stocking out or drowning in excess inventory.
What Is a Reorder Point?
A reorder point (ROP) is the inventory level that triggers a new purchase order. When your stock drops to this level, it's time to order more. The goal is to place that order early enough that new inventory arrives before you run out, but not so early that you're sitting on more stock than you need.
Think of it like the fuel gauge in your car. You don't wait until the tank is empty to fill up—you fill up when it hits a certain level. Your reorder point works the same way for inventory.
The Basic Reorder Point Formula
The standard formula looks like this:
Reorder Point = (Average Daily Sales × Lead Time in Days) + Safety Stock
Let's break that down with a real example. Say you sell 20 units per day of a particular SKU, and your supplier takes 14 days to deliver. Your basic calculation would be:
20 units/day × 14 days = 280 units
But that assumes everything goes perfectly—consistent demand and suppliers who always deliver on time. In practice, neither is true. That's where safety stock comes in.
Calculating Safety Stock
Safety stock is your buffer against variability. It accounts for the days when you sell more than average or when your supplier is late. A common approach uses this formula:
Safety Stock = (Maximum Daily Sales × Maximum Lead Time) − (Average Daily Sales × Average Lead Time)
Using our example, if your maximum daily sales hit 30 units and your supplier sometimes takes 18 days:
(30 × 18) − (20 × 14) = 540 − 280 = 260 units of safety stock
Your reorder point becomes: 280 + 260 = 540 units
When inventory hits 540 units, you place a new order. This gives you enough runway to cover both normal demand during lead time and unexpected spikes or delays.
Adjusting for Real-World Conditions
The formulas above work as starting points, but real inventory planning requires adjustments for your specific situation.
Seasonality
If you sell sunscreen, your July reorder point should be very different from your January reorder point. Use historical sales data from the same period in previous years to set seasonal reorder points. A product that averages 20 units/day annually might average 50 units/day in summer and 5 units/day in winter.
Supplier Reliability
Not all suppliers are equal. If your primary supplier delivers on time 95% of the time, you need less safety stock than if they're only reliable 70% of the time. Track actual delivery performance and factor it into your lead time variability calculations.
SKU Importance
A stockout on your top seller costs more than a stockout on a slow mover. Consider using different service level targets for different products. You might aim for 99% in-stock rates on your top 20% of SKUs and 95% on the rest.
How to Set Reorder Points: Step by Step
- Gather your data. Pull at least 12 months of sales history and lead time records for each SKU. More data gives you better averages and helps you spot variability.
- Calculate averages. Find your average daily sales and average lead time. Don't just use the last few weeks—include enough history to capture typical patterns.
- Measure variability. Look at your maximum daily sales and maximum lead time over the same period. These peaks drive your safety stock requirements.
- Set your service level target. Decide what stockout risk you're willing to accept. Higher service levels require more safety stock.
- Apply the formula. Plug your numbers into the reorder point calculation.
- Review and adjust. Set calendar reminders to review reorder points quarterly, or whenever you see significant changes in demand or supplier performance.
Common Mistakes to Avoid
- Using averages without considering variability. Average demand and average lead time give you a false sense of security. The spikes are what cause stockouts.
- Setting it and forgetting it. Demand changes, suppliers change, your business grows. Reorder points need regular updates.
- Ignoring lead time variability. Most brands focus on demand variability and overlook how inconsistent their suppliers are. Track actual delivery dates, not just quoted lead times.
- Treating all SKUs the same. Your hero products deserve different treatment than your long-tail items. Segment your inventory and set appropriate service levels for each group.
- Not accounting for order minimums. If your supplier requires minimum order quantities, your reorder point might need to trigger orders earlier than the formula suggests.
Key Takeaways
- Reorder points trigger purchase orders when inventory drops to a calculated level
- The basic formula is: (Average Daily Sales × Lead Time) + Safety Stock
- Safety stock buffers against demand variability and supplier delays
- Adjust reorder points for seasonality, supplier reliability, and SKU importance
- Review and update reorder points at least quarterly
Frequently Asked Questions
How do I set reorder points?
Calculate your reorder point using the formula: (Average Daily Sales × Lead Time in Days) + Safety Stock. Gather at least 12 months of sales and lead time data, calculate your averages and variability, then apply the formula. Review and adjust quarterly or when business conditions change.
What's the difference between reorder point and safety stock?
Safety stock is a component of the reorder point. Your reorder point is the inventory level that triggers an order, while safety stock is the extra buffer built into that level to protect against variability. Reorder point = expected demand during lead time + safety stock.
How often should I review reorder points?
Review reorder points at least quarterly for most products. High-volume or seasonal products may need monthly reviews. Also review whenever you change suppliers, see significant demand shifts, or notice increasing stockouts or overstock situations.
Can I use the same reorder point year-round?
For products with stable, consistent demand, yes. But most products have some seasonality. Using the same reorder point year-round means you'll either carry too much inventory in slow periods or risk stockouts during peak times. Adjust reorder points seasonally for better results.
What if my supplier lead times are inconsistent?
Inconsistent lead times require higher safety stock. Track actual delivery dates versus promised dates and use the maximum observed lead time in your safety stock calculation. Also consider diversifying suppliers or negotiating more reliable delivery terms.