Reorder Point: How to Know Exactly When to Reorder
The reorder point is the stock level at which you should place a new purchase order — not when you run out, not "whenever it feels low," but a specific, calculable number. Get it right and you stop choosing between stockouts and overstocking; get it wrong and you're always doing one or the other.
Businesses that switch from manual reordering to a calculated reorder point typically cut stockouts by 30–40% without increasing average inventory levels.
Origins
The reorder point formula is a direct companion to one of the oldest formal results in inventory theory: the Economic Order Quantity (EOQ), derived by Ford W. Harris in 1913 to answer how much to order at once. EOQ answers "how much," reorder point answers "when" — together they're the backbone of what's still called a continuous review, or (s, Q), inventory policy.
The formula
Reorder Point = (Average Daily Usage × Lead Time in Days) + Safety Stock. Average daily usage comes from recent sales history, lead time is how long your supplier actually takes to deliver — not what the contract says — and safety stock is the buffer that absorbs demand spikes or supplier delays.
Two review policies
Continuous review (s, Q): reorder a fixed quantity Q the instant stock hits point s
Periodic review (s, S): check stock only at fixed intervals, and order up to level S if below s
Continuous review needs perpetual tracking to work well; periodic review is simpler but reacts more slowly, since stock is only checked at the scheduled interval.
A worked example
Say a SKU sells 12 units a day on average, and your supplier takes 10 days to deliver once you order. That's 120 units consumed during the wait. Add a safety stock of 40 units to cover a bad week or a late shipment, and your reorder point is 160 units — the moment stock hits that number, the purchase order goes out, not before, not after.
| Daily usage | Lead time | Safety stock | Reorder point |
|---|---|---|---|
| 12 units | 10 days | 40 units | 160 units |
| 12 units | 20 days (unreliable supplier) | 40 units | 280 units |
Why this gets skipped
Most small businesses reorder when someone notices stock is "getting low," which depends on who's watching that day and how busy they are. The same SKU might get reordered with 200 units left one month and 40 units left the next, purely based on who happened to glance at the shelf.
- The same SKU gets reordered at wildly different stock levels depending on who's watching it
- Purchase orders go out reactively, right after a stockout, instead of before one
- Fast-moving and slow-moving SKUs use the same "reorder when low" instinct despite needing very different buffers
- Lead times are assumed from the supplier's quote instead of measured from actual past deliveries
A reorder point turns "I think we're getting low" into a number a computer — or a junior employee — can act on without guessing.
Getting the inputs right
The formula is simple; the inputs are where most people go wrong. Average daily usage should come from a recent, representative window — not last year's number if demand has shifted. Lead time should be the actual average of your last several orders, including the slow ones, not the supplier's best-case promise.
Matching the buffer to demand predictability
Not every SKU needs the same safety stock cushion inside its reorder point. A product with stable, easy-to-forecast demand can run a thin buffer; one with erratic, spiky demand needs a much wider one, even at the same average volume — the same distinction XYZ classification makes explicit.
Setting it up properly
Average your last 5–10 orders for that supplier, including any that ran late.
A SKU with wildly swinging sales needs more buffer than a steady one, even at the same volume.
A new supplier, a seasonal shift, or a demand spike should trigger a recalculation, not a one-time setup you forget about.
Limitations to keep in mind
- Assumes stable average usage — a strong trend or seasonal swing needs a forward-looking forecast, not a flat historical average
- Ignores order minimums and batch sizing — the reorder point tells you when, but EOQ-style logic still governs how much makes sense to order at once
- Lead time variability matters as much as its average — an unreliable supplier needs a wider buffer even if their average lead time looks fine on paper
Key takeaways
Reorder point = (average daily usage × lead time) + safety stock. Use real, measured lead times and revisit the number whenever demand or supplier performance shifts.
See also
- Safety stock
- Demand forecasting
- ABC analysis
- Economic Order Quantity (EOQ)
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