Key Takeaway: A reorder point is the stock level that triggers a new purchase order. Calculated, not guessed. It's one of the single highest-leverage fixes in inventory management.
What's on This Page
The Formula
Worked Example
A SKU sells 8 units/day on average. Your supplier's lead time is 10 days. You keep 20 units of safety stock as a buffer.
The moment stock hits 100 units, a new order should go out. Not when someone happens to notice the shelf looks low.
Why This Fixes Stockouts
Most recurring stockouts trace back to reordering being triggered by a visual check instead of a real number. A regional distributor eliminated recurring stockouts entirely by fixing exactly this. See the full case study.
Getting the Inputs Right
- Average daily sales: use recent, not year-old, data. Adjust for known seasonality
- Lead time: track this per supplier, not as one flat assumption for everyone (see Supplier Management Guide)
- Safety stock: covered in depth in Safety Stock Guide
For further reading, see the Association for Supply Chain Management (ASCM).
Checklist
- Calculate average daily sales for each key SKU
- Confirm current supplier lead time for that SKU
- Calculate or confirm the safety stock buffer
- Apply the reorder point formula: (average daily sales x lead time) + safety stock
- Set the reorder point as a real trigger in your system or process
- Review and adjust reorder points after any lead time or demand change
Common Mistakes
FAQ
What happens if lead time varies a lot between orders?
Use the longest realistic lead time in the formula, or build a larger safety stock buffer to cover that variability.
Should every SKU have its own reorder point?
Ideally yes, at least for A and B tier SKUs. Using one flat number across very different products leads to both overstock and stockouts.
How often should reorder points be recalculated?
Whenever sales velocity or supplier lead time changes meaningfully, and at minimum during a seasonal review.
What's the risk of setting the reorder point too high?
Excess safety margin ties up more capital in stock than necessary, adding unneeded carrying cost.
Calculate This For Your Business
Related Guides in the Inventory Academy
- Safety Stock Guide. calculating the buffer in this formula
- Inventory Forecasting Explained. getting a better demand number to feed this formula
- Why Inventory Mistakes Destroy Small Businesses. another guide in the Inventory Academy