How to set reorder levels for your products, with a simple formula

What is a reorder level?

A reorder level is the quantity on hand at which you must place a purchase order so the new stock arrives before you run out. It is set per product, because every product sells at its own speed and comes from a supplier with its own delivery time.

It is not the same as a minimum stock figure picked by feel. A good reorder level is worked out from three numbers you can check: how much you sell in a day, how many days the supplier takes, and how much spare you want for a bad week.

What is the reorder level formula?

Reorder level equals average daily usage multiplied by lead time in days, plus safety stock. The first part covers what you will sell while you wait for the order. The second part covers the surprises.

• Average daily usage: units sold or consumed per working day, from your own invoices and issues.
• Lead time: working days from placing the order to the goods being on your shelf, not the supplier's promised dispatch date.
• Safety stock: extra units held for a slow delivery or a busy week. A simple way to set it is daily usage × a few buffer days.

How do reorder levels work for a hardware shop?

Here are five products at Sri Kovai Hardwares, a fictional Coimbatore shop that buys steel racks from Lakshmi Steel Furnitures. Safety stock is daily usage × buffer days, and every reorder level below is the arithmetic of the columns before it.

Notice how lead time drives the result. Screws sell less than hinges, but the screw supplier takes 10 days, so the shop must reorder screws while 84 boxes are still on the shelf.

How do you get average daily usage from 90 days of invoices?

Add up the quantity of the product on every invoice line in the last 90 days and divide by the number of working days in that period. Ninety days is long enough to smooth out one odd week and short enough to reflect how the product sells now.

1. 1

   Pick the window

   Take the last 90 calendar days. Count the working days in it; a shop open six days a week has about 77.

2. 2

   Total the quantity sold

   Add the quantity on every invoice line for the product. For the hinges, that came to 1,925 pairs.

3. 3

   Subtract returns

   Take off quantities on credit notes for returned goods. Sri Kovai had 0 hinge returns in the window.

4. 4

   Add internal use

   If the product is also consumed in production or used on site, add those issues too. Usage is everything that leaves, not only sales.

5. 5

   Divide

   1,925 ÷ 77 = 25 pairs a day, the figure in the table above.

Do not use purchase bills to estimate usage. What you bought reflects what you ordered, including past mistakes, not what customers took.

How should you handle seasonal products?

A seasonal product needs a different reorder level for its busy months, because a 90-day average taken in the quiet season will run you dry in the peak. Paint and putty move faster before Diwali, and pipes and tarpaulins before the monsoon.

• Use the same months last year as the usage window, not the last 90 days, when the season is about to start.
• Raise the reorder level about one lead time before the season begins, so the first bigger order lands in time.
• Lower it again as the season ends, or you will carry the peak stock through the quiet months.
• Write the dates of the change in your quarterly review so the next person does it on time.

How much should you order when stock falls below the reorder level?

Order enough to bring stock back up to about twice the reorder level: reorder quantity = reorder level × 2 − on hand. It is a sane default because it refills the shelf, covers one more full lead time, and needs no extra number to maintain.

Here is the position at Sri Kovai on one morning, with the shortfall (how far below the reorder level each product sits) and the default order quantity. Hinges are above their level, so they are not ordered.

Adjust the default when the supplier sells in fixed packs, gives a better price above a quantity, or when cash is tight that month. The formula is a starting point, not a rule.

SimpleERP shows a low stock list and raises the purchase order from it

SimpleERP keeps a reorder level on each product and a low stock list of every product below it. The list is something you open, typically each morning or before the weekly supplier call. It does not send messages or notifications.

• Each row shows on hand, the reorder level and the shortfall.
• The preferred supplier comes from the last purchase bill for that product.
• One click creates purchase orders grouped by supplier, with the default quantity of reorder level × 2 − on hand, which you can change before sending.
• On hand comes only from posted documents (bills, invoices, notes, adjustments, transfers, work orders), so the list is as accurate as your posting.

Read more on the purchase management and inventory management pages.

Review reorder levels every quarter

Reorder levels go stale as sales, suppliers and prices change, so set a fixed day each quarter to recheck them. Thirty minutes with last quarter's invoices is enough for most small shops.

• Recalculate average daily usage from the last 90 days of invoice lines for your top-selling products
• Recheck lead time against the dates on recent purchase orders and bills, not the supplier's quote
• Raise safety stock for any product that ran out last quarter; lower it for products that sat untouched
• Archive products you are phasing out once their stock reaches zero, so they stop appearing on the list
• Plan seasonal changes for the coming quarter and note the dates
• Count the top products before the review, so on hand is right when you compare it with the level
• Check that every new product added last quarter has a reorder level