- Reorder point = demand during supplier lead time + safety stock.
- Use recent daily demand and the real lead time from order to usable stock, not the date on a quote.
- A correct quantity can still be a bad cash decision, so add a cash and shelf-life check before ordering.
Inventory creates a quiet timing problem. Order too late and sales stop while you wait. Order too early and cash sits on a shelf. A reorder point gives the team a visible trigger before either problem becomes urgent.
The formula is simple: expected demand during lead time, plus a small safety buffer. The hard part is feeding it honest numbers.
The formula, with a small example
Reorder point = average daily sales × lead time in days + safety stock.
A shop sells an average of eight units a day. Its supplier takes ten days from order to usable delivery. The owner keeps 24 extra units for ordinary variation.
8 × 10 + 24 = 104 units. When usable stock falls to 104, the order should be placed.
This is a trigger, not an order size. It answers “when?” A separate decision answers “how many?” Mixing the two often produces a large purchase just because the stock alert fired.
Measure the lead time customers actually experience
Do not copy the supplier's best-case promise. Count every day from sending the order to putting sellable stock on the shelf. Include approval delays, production, transport, customs, receiving and quality checks.
Use the median of recent orders for ordinary planning. Also record the slowest normal delivery. A supplier that usually takes eight days but often takes fourteen needs a different buffer from one that always arrives on day eight.
Choose safety stock without inventing precision
Safety stock covers normal uncertainty. Start with the extra demand you could face during a realistic delay. If daily sales vary by three units and a delay could last four days, 12 units is a reasonable first buffer.
Then review the cost of being wrong. A key spare part that stops paid work deserves more cover than a seasonal product that loses value next month. Use a range where the history is thin. Label the estimate rather than hiding it inside a formula.
| Signal | Raise the buffer | Lower the buffer |
|---|---|---|
| Demand | Wide weekly swings | Stable repeat sales |
| Supplier | Late or variable delivery | Consistent local supply |
| Customer impact | Stockout stops a service or loses a key account | Customers accept a short wait |
| Product risk | Long shelf life and reliable demand | Perishable, seasonal or fast-changing stock |
Add the cash check before every order
A reorder alert should open a decision, not spend money by itself. Before sending the purchase order, compare its cash date with payroll, tax, rent and supplier payments in the same forecast window.
Use the four-week cash-flow forecast for the timing. If the order creates a shortfall, reduce the batch, split delivery, negotiate terms or choose a faster supplier. Do not solve a stockout risk by creating a payroll risk.
Review slow stock at the same time
Fast sellers get attention because they trigger alerts. Slow stock often does more damage because it never asks for a decision. That matters. Add an age column. Mark units that have not moved in 30, 60 or 90 days, using intervals that fit your business.
Pause those reorders. Someone must explain the demand first. Discounting may release cash, but it can also train customers to wait. Bundling, returning stock to a supplier or using it in a service package may protect more value.
A 20-minute weekly routine
- Export units on hand, open purchase orders and the last eight to twelve weeks of sales.
- Flag low-stock items.
- Check cash timing and shelf-life risk before choosing a quantity.
- Review aged stock and stop automatic orders that no longer match demand.
- Record the decision, owner and next review date.
Keep the routine small enough to repeat. A rough trigger that gets reviewed every week is more useful than a complex model nobody trusts.
Frequently asked questions
Should I use sales or orders in the formula?
Use fulfilled unit demand when possible. Orders can overstate demand if cancellations are common, while sales can understate it when stockouts hid requests you could not fill.
How often should the reorder point change?
Review it monthly for stable items and weekly for seasonal or fast-moving stock. Recalculate after a supplier, price, product or delivery route changes.
What if I have very little history?
Use a low, base and high demand range. Buy a smaller first batch where supply allows, then replace estimates with actual sales and delivery data.
Is more safety stock always safer?
No. It reduces one risk while increasing cash, storage, damage and obsolescence risk. The right buffer protects service without hiding slow inventory.
Sources and scope
SCORE includes receivables and inventory ratios in its current small-business planning material, and its cash-flow training identifies poor inventory management as a common cash problem. See SCORE, Understanding Your Small Business and SCORE, Cash Flow Management Basics. The worked numbers above are illustrative, not benchmarks.