Running out of a bestseller mid-season is painful. So is discovering you've tied up three months of cash in slow-moving stock that nobody wants. Both problems often come back to the same root cause: no clear system for knowing when to reorder, and how much buffer to hold.
Reorder points and safety stock are the two tools that fix this. Neither requires specialist software or a complicated spreadsheet. Once you understand the logic, you can apply both in an afternoon.
What a reorder point is
A reorder point is the stock level that triggers a new purchase order. When a product drops to this number, it's time to reorder, regardless of what else is happening that week.
Without a reorder point, restocking tends to happen on instinct: someone notices the shelf is looking bare, or a customer asks about availability and sets off a small panic. That reactive approach is how stockouts happen.
A reorder point replaces the gut feel with a number you trust. It accounts for how fast you sell the item and how long it takes to arrive once you've ordered it. When stock hits the threshold, you order. The decision is already made.
How to calculate your reorder point
The formula has two parts: the stock you need to cover your supplier's lead time, plus a small buffer for uncertainty.
Reorder point = (average daily sales x supplier lead time in days) + safety stock
Say you sell 15 units of a product each day and your supplier takes 10 days to deliver. You need 150 units on hand when you place the order, just to cover that gap. Add safety stock on top and you have your reorder point.
Average daily sales is straightforward to calculate. Take the last 60 to 90 days of sales for that product and divide by the number of days. Use 60 days if your sales have been fairly steady; stretch to 90 days if demand varies throughout the year.
Lead time is where many small businesses underestimate. If you import goods, lead time is not just the days the goods spend on a ship. It covers the full gap from when you place the purchase order to when the stock is received, checked and ready to sell. For goods shipped from Asia, that can easily be 30 to 60 days once you account for production schedules, freight booking, ocean transit, customs clearance and delivery to your warehouse.
Track your actual lead time across your last five to ten purchase orders and average it out. That number is far more reliable than what your supplier quotes up front.
What safety stock is, and why it matters
Safety stock is the extra inventory you hold as a buffer against things going wrong. A shipment arrives two weeks late. A run of hot weather doubles demand for a product you barely expected to sell. Your supplier runs short.
Research suggests that around 70 to 75 per cent of stockouts are caused by flawed ordering and replenishment practices, not genuinely unpredictable events. Safety stock gives you breathing room while you build confidence in your numbers. It is not a permanent fix for a broken purchasing workflow, but it is a sensible cushion while you do that work.
The cost of getting it wrong matters too. Studies consistently show that a significant portion of customers who encounter a stockout will not wait or come back. For product businesses operating on tight margins, even a handful of lost sales each month adds up across a year.
How to calculate safety stock
There are several formulas, ranging from simple to more precise. A good starting point for most small businesses:
Safety stock = (maximum daily sales x maximum lead time in days) - (average daily sales x average lead time in days)
This formula accounts for both demand and lead time swinging at the same time, which is the scenario that actually catches businesses out.
A worked example. Suppose you average 15 units per day, but during a strong week you've sold as many as 25 units. Your average lead time is 30 days and at its worst it has stretched to 42 days.
Safety stock = (25 x 42) - (15 x 30) = 1,050 - 450 = **600 units**
That might feel like a lot. Check it against your storage capacity and the carrying cost of holding that stock. If it is more than you can comfortably absorb, consider whether you can negotiate shorter lead times with your supplier, break up orders into smaller, more frequent shipments, or accept a slightly higher risk for that particular product.
For a quick starting point when you don't yet have solid data, a reasonable rule of thumb is to hold five to seven days of average demand as safety stock, then refine from there once you have a few months of lead time records.
Putting it together with a worked example
Using the numbers above:
- Average daily sales: 15 units
- Average lead time: 30 days
- Safety stock: 600 units
Reorder point = (15 x 30) + 600 = 450 + 600 = 1,050 units
When stock levels hit 1,050 units, it's time to place a new order. By the time the shipment arrives (30 days on average), you should still have safety stock on hand rather than staring at empty shelves.
Once you've calculated this number, put it somewhere actionable. Whether that's a manual note attached to the product in your system, a reorder alert in your inventory software, or a standing item on your weekly purchasing review, the goal is that the reorder action happens before the crisis does.
When to review your numbers
Reorder points and safety stock are not set-and-forget calculations. They need revisiting when things change.
At the start of each financial year. If your business has grown, your average daily sales will be higher. The reorder points you set twelve months ago may be too low to protect you now.
Before seasonal peaks. If you typically double your sales in November and December, your reorder points for October should reflect that spike, not your annual average. Build the seasonal adjustment in before you need it, not during.
When your supply chain changes. A new supplier, a shift in shipping routes, or a move to local stock can all change your lead time significantly. Old numbers based on old lead times can leave you exposed without you realising it.
After a stockout or an overstock. Both are signals that something in your calculation is off. A stockout usually means your reorder point is too low or your safety stock is insufficient. An overstock suggests your average daily sales figure is higher than actual demand, or you've set safety stock too conservatively.
Reviewing your numbers takes less than an hour once you have the data. Most small businesses find that doing it quarterly, and again before any major sales event, keeps things well calibrated.
A note on tracking this well
The biggest practical challenge with reorder points is keeping the underlying numbers current. If your sales data lives in one place and your stock levels live in another, the calculation quickly falls out of date.
Inventory software that connects your sales channels to your stock records makes this considerably easier. With current data in one place, your reorder points stay accurate as sales patterns shift, and low-stock alerts fire at the right time rather than too late.
If you're ready to move beyond spreadsheets and gut feel, Hum is worth a look. You can try it free for 28 days, no consultant required, and set reorder points directly on each product from day one.