Reorder points: how to set a minimum stock level that works
A simple way to work out when to reorder each product, from how quickly it sells and how long your supplier takes to deliver.
By The Osmuch team · · 5 min read
In short
- A reorder point is the stock level at which you order more, so you never run out while waiting.
- Work it out as daily usage multiplied by the supplier's lead time, plus a safety margin.
- The safety margin covers busy weeks and late deliveries. A few days' usage is a sensible start.
- How much to order is a separate question: pack sizes, price breaks and cash tied up.
- Review your reorder points each season. Heating parts do not sell in July as they do in November.
Running out of a part costs more than the part. It costs the trip to a merchant, the job that slips a day, and the customer who hears that you are waiting for stock. Holding too much costs cash that could be doing something else. A reorder point is the simple rule that sits between the two.
What a reorder point is
A reorder point is the stock level at which you place an order. Set it right and the new stock arrives just as the old runs out, with a little to spare. Set it too low and you run out while you wait. Set it too high and the shelf fills with stock you did not need yet.
The calculation
You need two figures for each product: how many you use on an average day, and how many days your supplier takes to deliver after you order. Multiply them, then add a safety margin.
| Figure | |
|---|---|
| Average daily usage | 3 a day |
| Supplier lead time | 4 days |
| Usage while you wait (3 × 4) | 12 |
| Safety margin (two days' usage) | 6 |
| Reorder point | 18 |
Daily usage is easiest to find from the last three months: take how many went out and divide by the number of working days. Use working days, not calendar days, or quiet weekends will make fast products look slow.
Choosing a safety margin
The safety margin is there for the weeks that do not go to plan: a big job that eats a box of fittings, or a delivery that arrives two days late. A few days' usage is a sensible starting point. Give more margin to products that would stop a job if you ran out, and to suppliers who are often late. Give less to products you can pick up locally in an hour.
How much to order is a different question
The reorder point tells you when. How much depends on the pack size your supplier sells, any price break for buying more, how much space you have, and how much cash you want tied up on the shelf. A common approach is to order enough to cover a few weeks of usage, rounded up to the supplier's pack size.
Keep them up to date
Usage changes with the seasons and with the work you win. Look at your reorder points each quarter, and before a season you know is busy. If a product keeps going low before its order arrives, raise its reorder point. If it keeps sitting well above it, lower it.
Questions
What is the difference between a reorder point and a minimum stock level?
In practice they are often the same number: the level at which you want to be told to order more. Some businesses keep a separate, lower minimum as the level below which they will not go, but a single reorder point is enough for most small businesses.
How do I work out a reorder point?
Multiply the average number you use each working day by the number of days your supplier takes to deliver, then add a safety margin of a few days' usage.
Should reorder points change through the year?
Yes, if your work is seasonal. Review them each quarter and before a busy season, and raise them for anything that keeps running low before its order arrives.
Doing this in Osmuch
Set a minimum stock level on each product and Osmuch flags it as soon as the count falls to that level: on the inventory page, as a tile on the dashboard, and in the daily digest email if you switch it on. Each supplier's price and lead time are kept against the product, so the lead time the calculation needs is already on the record, and the purchase order to that supplier is raised from the same place. Osmuch tells you when to reorder; placing the order is still your decision.
Guide: low stock alerts and locations · Guide: the supplier stock list · Guide: supplier services and purchase orders