How to calculate your reorder point
Reorder too late and you run out of stock. Reorder too early and your cash sits on a shelf. The reorder point is the stock level at which you place your next order, and it takes only three inputs.
The formula
Compare it with your inventory position, which is the stock you have on hand plus everything already on order. When the position drops to the reorder point, it is time to order.
1. Average daily demand
Use recent sales, but correct them first. Days when you were out of stock understate real demand, and one-off promotions overstate it. A forecast by SKU that accounts for seasonality is better than a flat average, especially before peak season.
2. Total lead time
Count every step between the purchase order and sellable stock, not just transit.
- Production time at the factory
- Pickup, ocean or air transit, and customs
- Transfer to your warehouse or to Amazon
- Receiving and check-in, until the units are available to sell
The most common mistake is counting only the shipping time. Add all the steps, and use realistic numbers from your last few orders.
3. Safety stock
Safety stock is the buffer that protects you when demand is higher than expected or a shipment arrives late. The less reliable the supplier and the more volatile the product, the bigger the buffer should be. A practical starting point is a fixed number of extra days of cover, which you then adjust with your own data.
A quick example
A product sells 40 units a day. The total lead time is 90 days and you want 600 units of safety stock. The reorder point is 40 × 90 + 600 = 4,200 units. When your inventory position, including units in production and in transit, falls to 4,200, place the order.
Keep it current
Recalculate when lead times change, before peak season and after any stockout. A reorder point is not a number you set once.