Reorder Point Calculation 101: Never Miss a Replenishment

In inventory management, timing is everything. Order too late, and you'll face stockouts that frustrate customers and cost you sales. Order too early, and you'll tie up capital in excess inventory. The reorder point is that crucial inventory threshold that tells you exactly when to place a new order. In this comprehensive guide, we'll break down the reorder point formula, walk through practical examples, and show you how to implement this essential inventory management technique in your Shopify store.

What is a Reorder Point?

A reorder point (ROP) is the specific inventory level at which you should place a new order with your supplier. When your stock drops to this predetermined threshold, it's your cue to replenish that item. The perfect reorder point ensures you have just enough inventory to cover customer demand during the lead time (the time it takes for new inventory to arrive after you place an order).

Think of your reorder point as a strategic buffer: it's the minimum quantity you need to have on hand to satisfy customer demand while waiting for your next shipment to arrive.

Why Reorder Points Are Critical for Your Business

Setting accurate reorder points is not just a good practice, it's essential for several reasons:

• Prevents stockouts: Running out of stock is one of the fastest ways to lose customers and damage your reputation
• Optimizes inventory levels: Reduces excess inventory, freeing up cash flow for other business needs
• Improves supplier relationships: Creates predictable ordering patterns that suppliers appreciate
• Reduces stress: Eliminates the constant worry about whether you have enough stock
• Scales with your business: As your business grows, manual inventory monitoring becomes impossible

The Reorder Point Formula: Breaking It Down

The basic reorder point formula is:

Let's examine each component of this formula:

Average Daily Sales

This is the average number of units of a product you sell each day. To calculate this accurately:

For example, if you sold 900 units over the past 30 days:

Lead Time

Lead time is the number of days it takes from when you place an order with your supplier until the inventory is received and available for sale. This includes:

• Processing time (time for the supplier to process your order)
• Production time (if the product is made to order)
• Shipping time (transit from supplier to your location)
• Receiving and shelving time (time to process incoming inventory)

For example, if it typically takes 3 days for your supplier to process an order, 2 days for production, and 7 days for shipping and receiving, your total lead time would be 12 days.

Safety Stock

Safety stock is your insurance against unexpected events like demand spikes or supplier delays. It's the extra inventory you keep on hand to prevent stockouts during unusual circumstances.

A simple formula for calculating safety stock is:

For example, if your maximum daily sales are 45 units, your maximum lead time is 15 days, your average daily sales are 30 units, and your average lead time is 12 days:

For a more detailed breakdown of safety stock, check out our article on strategies to prevent inventory stockouts.

Calculating Your Reorder Point: A Complete Example

Let's work through a comprehensive example for a product in your Shopify store:

Step 1: Calculate Average Daily Sales

• Total units sold in the past 90 days: 2,700 units
• Average Daily Sales = 2,700 ÷ 90 = 30 units per day

Step 2: Determine Lead Time

• Supplier processing: 3 days
• Manufacturing: 0 days (product is stocked by supplier)
• Shipping: 7 days
• Receiving and shelving: 2 days
• Total Lead Time = 12 days

Step 3: Calculate Safety Stock

• Maximum daily sales (highest sales day in past 90 days): 45 units
• Maximum lead time (longest lead time experienced): 15 days
• Safety Stock = (45 × 15) − (30 × 12) = 675 − 360 = 315 units

Step 4: Calculate the Reorder Point

This means that when your inventory level drops to 675 units, it's time to place a new order with your supplier.

Reorder Point Variants for Different Business Scenarios

The standard reorder point formula works well for many businesses, but you might need to adjust your approach based on your specific circumstances:

Scenario 1: Seasonal Products

For products with strong seasonality, calculate separate reorder points for different seasons. Use historical data from the same season in previous years to determine your average daily sales.

Scenario 2: New Products

For new products without sales history, base your reorder point on:

• Sales data from similar products
• Industry benchmarks
• Pre-order or early sales data
• Supplier minimum order quantities

Start conservative and adjust as you gather real sales data.

Scenario 3: Multi-Location Businesses

If you fulfill orders from multiple warehouses or stores, you may need:

• Location-specific reorder points based on local demand
• Central inventory management with redistribution policies
• Aggregate demand forecasting with location-specific allocation

Common Reorder Point Mistakes to Avoid

As you implement reorder points in your inventory management strategy, watch out for these common pitfalls:

1. Not Accounting for Growth

If your business is growing rapidly, historical average daily sales might underestimate future demand. Consider factoring in your growth rate when calculating reorder points.

2. Setting and Forgetting

Reorder points should be dynamic. Review and adjust them quarterly or when significant changes occur in:

• Demand patterns
• Supplier lead times
• Product lifecycle stage
• Market conditions

3. Ignoring Supplier Constraints

Ensure your reorder point system accounts for:

• Minimum order quantities
• Order multiples
• Supplier production schedules
• Volume-based pricing tiers

4. Not Tracking Reorder Point Performance

Monitor key performance indicators to evaluate your reorder point effectiveness:

• Stockout frequency
• Inventory turnover rate
• Days of supply
• Carrying costs

Tools for Managing Reorder Points

Several tools can help you implement and manage reorder points:

1. Spreadsheets

For businesses with a small catalog, spreadsheets can work for basic reorder point calculations. Create columns for average daily sales, lead time, safety stock, and reorder point, then update them regularly.

2. Shopify Apps

Several Shopify apps offer reorder point functionality, alerting you when inventory reaches predefined thresholds.

3. Inventory Management Software

Dedicated inventory management solutions can:

• Automatically calculate reorder points based on historical sales
• Send alerts when inventory reaches reorder points
• Generate purchase orders automatically
• Adjust reorder points dynamically as conditions change
• Account for seasonality and trends in calculations

For a quick way to calculate reorder points for your products, try our free Reorder Point Calculator.

Automating the Reorder Process

The ultimate goal of establishing reorder points is to create a system that largely runs itself. Here's how to move toward automation:

Step 1: Set Up Inventory Alerts

Configure your system to notify you when stock levels reach reorder points. These alerts can come via email, SMS, or dashboard notifications.

Step 2: Create Purchase Order Templates

Develop templates for each supplier that include:

• Your standard terms and conditions
• Shipping preferences
• Product codes and descriptions
• Pricing agreements

Step 3: Implement Order Approval Workflows

Create a streamlined process for reviewing and approving purchase orders before they're sent to suppliers.

Step 4: Use Software for Full Automation

Advanced inventory management systems can:

• Monitor inventory levels continuously
• Generate purchase orders automatically when reorder points are reached
• Send orders directly to suppliers (with approval if desired)
• Track expected delivery dates and notify you of potential delays
• Update inventory forecasts based on actual sales and lead times
• Dynamically adjust reorder points as conditions change

Conclusion: Taking Control of Your Inventory Replenishment

Establishing proper reorder points is one of the most impactful steps you can take to improve your inventory management. By knowing exactly when to place new orders, you can prevent stockouts, reduce excess inventory, and create a more predictable, less stressful ordering process.

Start by calculating reorder points for your most important products using the formula we've outlined. Then gradually expand to your entire catalog, refining your approach as you gather more data. Remember that reorder points aren't static, they should evolve as your business grows and market conditions change.

Whether you manage reorder points with spreadsheets, Shopify apps, or dedicated inventory management software, the key is consistency and regular review. With a systematic approach to reordering, you'll create a more efficient, profitable business that keeps customers happy by having the right products available at the right time.