Inventory reorder point:
the stock level that triggers the next order

Order while there is still stock on the shelf

Suppliers do not deliver the moment you place an order. During the days between order and arrival, customers keep buying from whatever you have left. The reorder point is the stock level at which you must place the next order so that the shelf does not run empty before the delivery lands.

Set it too low and you lose sales; set it too high and you hold more stock than you need, tying up cash and storage space.

The formula and its two parts

The first term, demand during lead time, is the stock you expect to sell while waiting. The second term, safety stock, is insurance for the fact that real days are never exactly average.

A worked example

A shop sells about 18 units a day of a particular item. The supplier takes 12 days from order to delivery, and the owner keeps 75 units as a buffer.

If the supplier slips to 14 days with no change in demand, the same logic gives 18 × 14 + 75 = 327 units, so a longer lead time moves the trigger up by 36 units. Demand rising to 20 a day gives 20 × 12 + 75 = 315.

Setting safety stock without guessing

A simple method uses a fixed number of extra days. A more careful one ties the buffer to how much daily demand varies.

That is how a buffer of 75 can be justified for an item with erratic sales. A steadier item with σ of 5 units would need only about 29, so one buffer size does not suit every product.

What a bigger buffer costs

Each extra unit of safety stock is cash that cannot be used elsewhere, plus storage, insurance and the risk of damage or expiry. A rough check is to multiply the buffer by the unit cost and by your holding-cost percentage.

A tool that measures how fast stock sells through can show which items deserve a bigger buffer and which are overstocked.

Pairing the trigger with an order quantity

The reorder point answers when to order; it does not say how much. The quantity depends on the cost of placing an order, the cost of holding stock and the discounts on offer. A classic approach is the economic order quantity, which balances the two costs.

With annual demand of 6,570 units (18 a day over 365 days), an ordering cost of ₹500 and holding cost of ₹20 per unit per year, the quantity is √(2 × 6,570 × 500 ÷ 20) = √328,500 ≈ 573 units. Treat it as a guide, then adjust for supplier pack sizes and discounts.

Running the system day to day

A reorder point is only useful if someone checks the stock against it. Many small businesses set a visual signal, such as a marked line on the shelf or a flag in the billing software, so the order is raised without anyone doing a calculation. Software that shows stock on hand plus stock on order against the trigger avoids double ordering.

Exceptions need judgement. Promotions, festivals, new competitors and supplier shortages all make the average stale. When one of these is coming, raise the figure on purpose rather than waiting for a stockout to teach you. After the event, lower it again so the extra stock does not linger.

A short monthly review of the items that stocked out, and the items with the most idle stock, is usually enough to keep every number honest.

Applying it across hundreds of items

Few businesses can fine-tune every product. Sort items by annual sales value and give the most care to the top group, often a fifth of the range that brings in most of the revenue. Those items deserve measured demand, tracked lead times and statistical buffers. The middle group can use simple day-count rules, and the long tail can be ordered in larger, less frequent batches.

For items with uncertain suppliers, record actual delivery times for a few orders and use the longest typical value rather than the quoted one. A supplier who is late one order in five effectively has a longer lead time than the brochure suggests, and your trigger should reflect that.

When the supplier is not consistent

The simple formula treats lead time as a fixed number. In practice deliveries vary, and that variation needs its own buffer. If a supplier delivers in 12 days on average but sometimes takes 16, planning on 12 will produce regular stockouts.

One practical response is to plan on a high but realistic lead time, such as the 80th percentile of your last ten deliveries. Another is to split orders between two suppliers, so that a delay at one does not empty the shelf. Both cost something, so weigh them against the sales lost during a stockout.

Mistakes that cause stockouts anyway

• Using a supplier's quoted lead time rather than the actual average, which is often longer.
• Averaging demand across a seasonal year and applying it to the busiest month.
• Counting stock on order as available stock when comparing against the trigger.
• Applying one rule to every item rather than separating fast movers from slow ones.
• Never updating the number after prices, suppliers or sales patterns change.