Reorder point: two numbers that make reordering easier

Reordering by eye works until a busy week empties a shelf before anyone notices. Two numbers worked out from your own sales make the decision routine, which makes a reorder point for small business buying worth setting even with only a few suppliers. One says how many days your stock will last. The other says the stock level at which you place an order.

Days of cover

This figure is stock on hand divided by average daily sales. With 40 units on hand and sales of 8 a day, you have 5 days of stock left. If your supplier takes 7 days to deliver, you are already 2 days late, and the shelf will sit empty until the order arrives.

The same measure is sometimes called days of supply. It rests on two inputs:

• Stock on hand is what you counted or recorded, not what you think is there. An uncounted product has no cover figure at all.
• Average daily sales is units sold over a recent window divided by the days in that window. A 30 day window suits most products. A 7 day window reacts faster to a change, and a 90 day window smooths out a lumpy product that sells a few units at a time.

A recent window reflects how the product sells now rather than last season. Count the days with no sales, or the average comes out too high.

The reorder point formula

The level at which you reorder is the stock you will sell while a new delivery is on its way, plus a buffer:

Trigger level = average daily sales × (supplier lead time + safety days)

The first part, daily sales times lead time, is the lead time demand. It is the units you expect to sell between placing an order and receiving it. The second part covers the things that go wrong. A busy weekend, a late truck or a short shipment all eat into the stock you planned to have.

Textbooks express the buffer as safety stock, a quantity of units worked out from how much demand and lead time vary (Wikipedia overview). Expressing it in days keeps it in proportion to the product. Three safety days is 24 units for a product that sells 8 a day and 3 units for one that sells 1 a day. For a small store without years of clean data, days are easier to set and explain.

How to calculate reorder point

1. Choose a sales window, such as the last 30 days.
2. Divide units sold in that window by its number of days to get average daily sales.
3. Ask your supplier for the usual lead time in days, from order to goods on the shelf.
4. Pick the safety days: more for a product with an unreliable supplier or uneven sales, fewer for a steady one.
5. Multiply average daily sales by lead time plus safety days. When stock on hand is at or below that number, order.

This is the standard method taught in operations courses (Wikipedia summary). The version here swaps the statistical buffer for a fixed number of days.

How much to order

The trigger tells you when. The quantity depends on how often you check stock. If you review stock every 7 days, the next order has to last until the review after the delivery, or you will be back at the trigger with no time to react.

Order up to = average daily sales × (lead time + safety days + review days), rounded up

Subtract stock on hand from that figure to get the units to order. Rounding up keeps a slow seller from being ordered a fraction short.

A worked example

This is a worked example with made-up products. The settings are a 7 day lead time, 3 safety days and 7 days between reviews, and sales are taken from the last 30 days.

The coffee has almost 9 days left, but the delivery takes 7 and the buffer is 3, so it is due. The oat milk has stock above its trigger and waits for the next review. The cup sleeves sit a fraction below their trigger, and rounding 28.3 up to 29 gives an order of 13.

When to reorder inventory

Check the numbers on a fixed schedule, the same number of days apart as the review days in your formula. At each review, order every product at or below its trigger and leave the rest. Between reviews, a product that sells faster than usual can still cross its trigger, which is what the safety days are for.

Turning the trigger into an alert

Once you have a trigger level, you can enter it as a low stock threshold for each location so the system flags the product for you. In headoffis, Count / alerts sets an optional alert level for each product at each location, and Alerts lists everything at or below it. Restocking above that level clears the alert.

The Sales & stats page works the numbers out for you. It shows units per day, current stock and cover for the last 7, 30 or 90 days. The replenishment settings hold one lead time, one set of safety days and one review interval for the whole business. A product is suggested for reorder when its stock is at or below daily sales × (lead time + safety days). The suggested quantity tops stock up to daily sales × (lead time + safety days + review days), rounded up. Units held at other locations are shown, so you can transfer before you buy.

What the numbers miss

Both numbers look backwards. They do not know about a delivery already on its way, a promotion next week, or a season starting. The current day is part of the sales window, so a morning check sees only part of today's sales. headoffis suggestions do not place orders or move stock, and they do not track inbound orders.

Use the numbers to decide what to check, then use what you know about the store to decide what to order. If you want to go further, MIT's course on supply chain planning covers forecasting and inventory reorder policies in depth.

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