How to set a reorder point for an inventory item

Think of a long drive and the fuel gauge. You do not wait for the engine to cough before you start looking for a gas station. You stop when there is enough fuel left to reach the next one, plus a bit more because the next one might be closed.

A reorder point works the same way. It is the stock level at which you place an order so the delivery arrives before the shelf runs out. Get it right and you rarely think about the item. Get it wrong and you think about little else.

The formula

There are two parts. First, what you expect to use while you wait for the delivery. Second, a cushion in case you use more than expected or the supplier runs late.

Reorder point = (average daily use x lead time in days) + safety stock. In the example, that is (3 x 5) + 12 = 27 gallons. When the available stock reaches 27, you place the order.

What it looks like over time

Plot the stock level over a few weeks and you get a sawtooth. It falls steadily as you sell, you place an order at the reorder point, the shelf keeps falling during the wait, and the delivery lifts it back up.

If the line ever touches zero before a delivery lands, one of your numbers was wrong. Either you use more than you thought, the supplier takes longer, or the cushion is too thin.

Where the numbers come from

• Average daily use: picks over the last two or three months, divided by the days you were open. A single busy week will mislead you.
• Lead time: days from sending the order to receiving it, taken from the last few deliveries. Use what happened, not what the supplier promised.
• Safety stock: the cushion. Safety stock explained for small businesses covers how to size it.

Use available stock, not on hand

Stock that is reserved or blocked cannot be picked, so it does not protect you from a stockout. Compare the reorder point with what is available to pick, which is on hand minus reserved and blocked.

Common mistakes

• Using one reorder point for every item. A fast mover and a slow mover need different numbers.
• Ignoring a minimum order quantity. If the supplier only sells in cases of 24, set the reorder quantity to 24 or a multiple, and check you can afford the extra stock.
• Setting it once and never looking again. Revisit your top items when the season changes.

When demand is not steady

The formula assumes you sell about the same amount every day. Many items do not. Sunscreen in July, salt in January, paint on spring weekends. For those, a single reorder point is wrong half the year.

The practical fix is not mathematical. Keep two numbers for the item, a busy-season one and a quiet-season one, and swap them when the season turns. Put a reminder in the calendar. It is crude and it works better than most forecasting tools a small shop will ever buy.

For a brand new item with no history, guess generously, watch it for a month, and then replace the guess with real numbers. The first reorder point is a hypothesis.