How to set reorder points so you never run out

A reorder point is a number for each product. When your stock falls to that number, you order more. Not before, because you would be tying up cash in stock you do not need yet. Not after, because you would run out before the delivery arrives.

Most shops set this by feel: "when the shelf looks thin, I order". That works for a handful of products, and it fails in predictable ways. A product that sells fast looks fine on Monday and is gone by Wednesday. A product that sells slowly looks thin for months and you reorder it too early. And when you are away, nobody else knows what "thin" means.

A written number fixes all three. It does not take the judgement out of buying, but it gives you and your staff something firm to check against. If you want a quick answer without working through the sums, the reorder point calculator does the arithmetic. It is still worth understanding what the numbers mean, because that is how you spot a result that does not make sense.

Three ingredients, each of which you can work out from things you already know about your shop.

Average daily sales

How many of the product you sell on a typical day. Look at a recent stretch, such as the last four weeks, add up the units sold and divide by the number of days. Using at least a few weeks smooths out the odd quiet or busy day. If you only trade five days a week, divide by the days you were actually open.

Lead time

How many days pass between deciding to order and having the stock on your shelf. Count the whole journey: calling the supplier, waiting for the next delivery run, and putting the boxes away. If your supplier only delivers on Thursdays and you order on Friday, your real lead time is nearly a week, whatever they say about next-day delivery.

Safety stock

A cushion for the days that do not go to plan: a busier than usual week, or a late delivery. Without it, the formula assumes everything runs exactly on average, and that almost never happens.

Take a 1 L bottle of cooking oil. You buy it for $3.00 and sell it for $4.50. Here is how to set its reorder point.

1. Find average daily sales

   Over the last 28 days you sold 140 bottles. 140 divided by 28 is 5 bottles a day.

2. Find the lead time

   Your supplier delivers three days after you order. Lead time is 3 days.

3. Work out demand during the wait

   5 bottles a day for 3 days is 15 bottles. If you reordered with exactly 15 left and everything went to plan, the delivery would arrive as the last bottle sold.

4. Add safety stock

   Your busiest day in the last month was 9 bottles, which is 4 more than usual. If that kind of day hit every day of the wait, you would need 4 x 3 = 12 extra bottles. That is a generous cushion, which is right for a product you cannot afford to be without.

5. Add them up

   15 + 12 = 27 bottles. When the shelf and back room hold 27, it is time to order.

Now check what the number does. You place the order at 27. Over the 3 days of waiting you sell about 15, so you have around 12 left when the delivery lands. That 12 is your safety stock, untouched on a normal week. On a bad week you dip into it and still have bottles to sell. The number is doing its job.

Safety stock is the part people fret about, and a simple rule is usually enough. Pick whichever of these fits the product.

• Busiest day method. (Your busiest day's sales minus your average day) x lead time. The oil example above used this. It is easy to explain and to check against your records.
• Days of cover. Keep an extra number of days of average sales, such as two. For a product that sells 5 a day, that is 10. Quick, and fine for most products.
• Percentage. Add 25 to 50 percent to the demand during lead time. Handy when you do not have daily records yet.

How big a cushion you want depends on what a stock-out costs you. A product that customers come in specifically for, such as the staple they buy every week, deserves a generous cushion. A product that is easily swapped for another brand can run closer to the line. And a slow, expensive product should have a small cushion, because the cushion itself ties up cash.

The same formula gives very different answers depending on how a product sells and how it is supplied. Here are three products from the same shop.

Notice that oil and rice end up with the same reorder point for different reasons. Oil sells quickly but arrives fast. Rice sells at a more modest pace but takes a week to reach you, so it needs the same cushion of stock. If you only looked at daily sales, you would guess that oil needs more.

The hot sauce shows the other end. Half a unit a day means one sale every couple of days, and a reorder point of 3 is plenty. Setting that to 20 "to be safe" would mean cash sitting on a shelf for months.

Weekly deliveries and fixed order days

If your supplier only visits on a set day, the lead time is the gap until that day plus the delivery time, and it varies depending on when in the week you realise you are low. A common fix is to treat the lead time as the full length between visits for the products on that run, and check stock the day before every delivery rather than waiting for a crossing.

The reorder point tells you when to order. How much to order is a separate question, and a simple answer works for most small shops: order enough to cover the number of days until you will next order, plus the lead time.

If you want about two weeks of oil on the shelf after each delivery, that is 14 days x 5 bottles = 70 bottles. When the delivery arrives you will hold roughly 12 (what is left) plus 70, so around 82. By the time you hit 27 again, you will have sold about 55 over 11 days and it is time to order once more.

Several things can pull the amount up or down from that simple figure.

• Case sizes. If the supplier sells in cases of 12, round up to the next case, not the next bottle.
• Price breaks. A bigger order may be cheaper per unit. That is worth taking only if the product sells steadily and does not spoil.
• Shelf and storage space. There is no point ordering 200 if the back room holds 120.
• Shelf life. For anything that can expire, order less and more often.
• Cash. Every order uses up money you cannot spend elsewhere. Smaller, more frequent orders are kinder on cash, if your supplier allows them.

A reorder point is a snapshot. It was right for the sales rate and supplier you had when you worked it out, so check it again whenever one of these changes.

• Season. Cold drinks in a heatwave, school supplies in the weeks before term, anything tied to a holiday. Raise reorder points before the rush and lower them after.
• A new supplier or delivery day. Lead time is half the formula.
• A price change or promotion. A discount can double sales for a week.
• A new competitor, or a change on your street. Foot traffic shifts.
• A product that is dying off. If sales have dropped a lot, the old number is now far too high. Read what to do about slow-moving stock.

A good habit is to review the numbers for your top 20 sellers once a month and the rest every few months. It takes about as long as a cup of tea.

Using one number for every product

"Reorder at 10" for everything means fast sellers run out and slow sellers sit forever. Each product needs its own number, because each one sells and arrives at its own speed.

Counting only the shelf

If a product has 6 on the shelf and 30 in the back, you are not low. Compare the reorder point against the total, not just what you can see. A wrong count is the usual reason reminders fire at the wrong time, so keep your counts honest.

Forgetting that lead time starts when you decide

Lead time is not the supplier's quoted delivery time. It starts the moment you notice you are low. If you only check stock on Sunday and the supplier delivers on Tuesday, that gap is part of the wait.

Setting it once and never revisiting

A number that was right in March can be badly wrong by July. Put the review in your calendar.

Making the cushion so big it hurts

Too much safety stock is a quiet problem. Nothing runs out, so nothing looks wrong, but cash is stuck on shelves and old stock expires or goes out of fashion. If you never run out of anything, your numbers are probably too high.

Ignoring returns, damage and loss

If you use sales alone to work out average daily sales, you will understate how fast stock really leaves. Count anything that goes off the shelf for any reason, and your numbers will be closer to what you actually need to buy.

• List your top 20 sellers, or the products where a stock-out costs you the most.
• For each, add up units sold over the last four weeks and divide by the days you were open.
• Write down each supplier's real lead time, including your own ordering delay.
• Multiply average daily sales by lead time.
• Choose a safety stock using one of the three methods, and make it larger for essentials and smaller for slow, costly items.
• Add the two together and write the result as that product's minimum.
• Decide an order quantity too, rounded to case sizes.
• Check the total stock, shelf plus back room, against the number.
• Put a monthly reminder in your calendar to review the top sellers.
• Adjust before a known busy season, not during it.

Shopkeepa is built so the number you work out here actually does something. You set a minimum on each product, and when stock crosses it you get one reminder, then the product joins a restock list with a suggested order quantity. You are not left remembering to check the shelf.

Because every sale and delivery updates stock as it happens, the numbers behind your reorder points stay current, and the sales reports show how fast each product actually moves. Learn more about low-stock reminders. Shopkeepa is in development, and early access shops will help shape it.