Reorder Point Formula: When to Order Stock for Your Shop

The Tuesday that cost a shop ₹18,000

A kirana store owner in a Tier-2 city waited for his supplier every Tuesday. One week he was on the shop floor, handling customers, and the salesman came and went. The order was placed in a hurry and barely checked.

The following Monday, tea powder ran out. The next delivery was not due until the Tuesday after that. For eight days there was no tea powder on the shelf, and by then the regulars in that lane had started buying from the shop across the road. His own estimate of the damage was around ₹18,000, and the loss was not limited to tea powder, because customers who switched shops bought the rest of their basket there too.

This is a representative example. Names and identifying details have been changed.

He was not short of software. He was short of one number: the stock level at which the order should have gone out.

About Accountune

Accountune is cloud-based GST billing, inventory and accounting software, built in Jaipur in 2017. More than 12,000 Indian small businesses use it today across kirana, medical, hardware, electronics, garment, footwear, jewellery, wholesale and small manufacturing. Every item can carry its own minimum stock level, and a low stock alert is raised as soon as stock falls below that level. The Free plan is available at ₹0 and paid plans start from ₹799 per year.

What is the reorder point formula and how do you calculate it?

Quick answer: The reorder point formula is (daily sales × lead time in days) + safety stock. In Accountune this number becomes each item's minimum stock level, and a low stock alert is raised the moment stock falls to it, so nobody has to remember a hundred items. In Indian shops, lead time should be counted from the supplier's visit cycle, not from a purchase order.

What a reorder point is

The reorder point is the stock level at which you place a fresh order.

It does not mean the item has run out. It means that what is left will last exactly as long as the new supply takes to arrive. The order goes out while the shelf still looks full, and that is the part most shop owners find counterintuitive.

The basic reorder point formula is:

Reorder point = (Daily sales × Lead time in days) + Safety stock

You need three numbers. How much sells per day. How many days new supply takes. And how much buffer you want in case the supplier is late or sales spike.

Every inventory guide in the world gives this same reorder point formula. Zoho Inventory illustrates it with a perfume retailer selling 200 bottles a day, ShipBob with an ecommerce brand selling dog bandanas, and Netstock with a bakery ordering eggs. The formula is correct. The problem is that all three are written for warehouses and ecommerce, where a purchase order is sent to a supplier. In an Indian shop the supplier comes to you, and that single difference changes the whole calculation.

Finding your daily sales when you have no records

Every guide says to work out average daily demand and then moves on. The reality is that most shop owners have no item-level sales record at all. The day's total collection is known; how many packets of tea powder sold is not.

Without that number, a reorder point is a guess rather than a calculation.

There are three ways to get it, worst to best.

Work backwards from purchases. How many packets of that item did you buy in the last three months? How many are on the shelf today? Divide the difference by the number of days. It is rough, but good enough to start.

Count by hand for a month. Write down only your top 20 items in a notebook, every evening. After a month you have real data. It is laborious but it costs nothing.

Let billing do it. If every bill is made in software, item-level sales are recorded automatically. Accountune's business reports break sales down by item, and the daily average falls out of that. This is why shops that already bill digitally get more out of a reorder point than shops that do not.

Two cautions. You need at least 30 days for a usable average. And if a major festival fell inside that month, that month is not a fair average, which is handled separately in section 10.

The formula with a rupee example

Take a kirana store.

Tea powder in 250 gram packets. Last month's record shows an average of 12 packets a day. The supplier's salesman comes every Tuesday, takes the order that day, and delivers the following Tuesday. Lead time is 7 days.

Reorder point = 12 × 7 = 84 packets

Safety stock has not been added yet. So the order goes out when 84 packets are left on the shelf. If supply arrives exactly on the seventh day, stock will be at precisely zero on the day the delivery lands.

Hitting zero is dangerous. One busy day, or one day of supplier delay, and the shelf is empty for two days while customers walk to the next shop. So safety stock is added. Assume a three-day buffer:

Safety stock = 12 × 3 = 36 packets Reorder point = 84 + 36 = 120 packets

The order should now go out when 120 packets are left. That is what the reorder point formula produces for this item.

The same formula for two other trades:

Notice that the hardware item has the largest reorder point despite the smallest daily sales. Lead time is why. The further the goods travel, the earlier the order has to go out.

How to calculate supplier lead time in Indian conditions

This is where every foreign guide goes wrong.

Zoho, ShipBob and Netstock all measure lead time the same way: a purchase order is sent, the supplier dispatches, the goods arrive, and the days in between are the lead time.

Indian shops do not work that way. The supplier or his salesman arrives on a fixed day. You place the order then. If you were distracted that day, or stock looked comfortable at the time, the next opportunity is a week away.

Which means:

Real lead time = days for supply to arrive + wait until the next visit (if today's chance is missed)

In the tea powder example supply arrives in 7 days. But if no order is placed on Tuesday, the next order goes out the following Tuesday and the goods land the Tuesday after that. The worst case is 14 days, not 7. That is exactly what happened in the story at the top of this page.

There are two ways to handle it.

Set the reorder point against the visit cycle, not the calendar. Every Tuesday morning, before the order goes out, check stock. The question is not whether you have reached your reorder point. The question is whether you will make it to next Tuesday. If the answer is not a confident yes, order today.

Or size safety stock to a full visit cycle. For tea powder that means 7 days of safety stock instead of 3, giving a reorder point of 84 + 84 = 168 packets. More money sits in stock, but a missed visit no longer empties the shelf.

The second approach suits fast-moving items with no expiry. The first suits everything else. Accountune lets you set a different minimum stock level on every item, so fast movers can carry a high level and slow movers a low one. Applying a single rule across the whole shop is the most common mistake here.

How much safety stock to keep

Safety stock is the extra stock you hold purely because the world does not follow forecasts.

Two things push it up. First, variability in sales: if you usually sell 12 packets but occasionally sell 20, you need a buffer. Second, supplier reliability: if the supplier always delivers in exactly 7 days the buffer can be small, and if it swings between 7 and 12 it cannot.

ShipBob publishes a statistical version: (maximum daily sales × maximum lead time) minus (average daily sales × average lead time). It is correct, but it assumes you hold both maximum and average figures. For a small shop, thinking in days is far more usable:

For some goods, less safety stock is better.

Perishables. Milk, paneer, vegetables, fresh bakery. A larger buffer here just becomes waste. Keep the reorder point low and order more often.

Items with expiry dates. In a medical store, safety stock is tied directly to shelf life. If an item moves slowly and the remaining shelf life is short, increasing the buffer is a straight loss. Batch and expiry handling is covered separately in the pharmacy billing and batch expiry guide.

High-value goods. Jewellery, heavy machinery, expensive electronics. Every extra unit locks up serious money. Keep the buffer thin and arrange faster resupply instead.

The four levels: reorder, minimum, maximum, danger

Indian cost accounting defines four stock levels. Many experienced shop owners and accountants still use these terms, so they are worth knowing.

Reorder level is the point at which a fresh order goes out. Reorder level = Maximum sales × Maximum lead time

Minimum level is the lowest stock that should ever be on hand. Minimum level = Reorder level − (Average sales × Average lead time)

Maximum level is the ceiling beyond which stock should not rise. Maximum level = Reorder level + Order quantity − (Minimum sales × Minimum lead time)

Danger level sits below the minimum, and at that point you stop waiting for normal supply. Danger level = Average sales × Emergency procurement time

The practical position is that a small shop does not need to record all four. Two are enough. Order at the reorder level. At the danger level, get goods from anywhere at any price, even a costlier supplier. Minimum and maximum levels matter more to larger stores and manufacturing units, where godown space and working capital are both constrained.

Working all four out for one item is a useful exercise. Maintaining all four for every item in the shop is paperwork.

How to set a minimum stock level when cash is tight

You will not find this section in any foreign guide, because they assume you can order whatever the formula says.

The real situation looks like this. Three items have hit their reorder point and the total order comes to ₹1,20,000. You have ₹40,000.

Do not cut everything equally. The most common mistake is ordering a third of each. All three then run out mid-month and you spend money three more times.

Allocate by turnover instead. Fill the fastest-moving item to its full reorder point. Skip the slowest one this round. Money in a fast mover comes back within days and funds the next purchase itself.

Consider the arithmetic. ₹15,000 of tea powder sells through in 12 days. ₹15,000 of an expensive imported item takes 90 days. The same money is tied up in both, but the first turns over more than twice a month and the second once a quarter.

Supplier credit is also an option. If a supplier offers 21 days, that item's order can go out in full today because payment is due later. Keep the cash-only supplier's order small. This only works if you can track who is owed what and when, which is what payment tracking is for.

Split the order, but split it correctly. Two smaller orders are fine, provided each one fills a single item completely. Giving every item a partial quantity is the most expensive option available.

MOQ and distributor schemes

Your reorder point says 120 packets. The distributor says the minimum is one carton, and a carton holds 144. Or he offers 10 cartons with 1 free.

Now the formula and the scheme are in conflict.

First, work out what the scheme is really worth. Buy 10, get 1 free means you paid for 10 cartons and took home 11. The discount is 1 ÷ 11 = 9.1 percent, not 10 percent. It is a small difference, but it is routinely calculated the wrong way round.

Then work out how long the goods will last. If you sell 2 cartons a month and you are taking 11, that is five and a half months of stock.

Now put the two together. For five and a half months that money cannot be used for anything else. If the same money could have gone into a fast mover turning over twice a month, a 9.1 percent discount is an expensive trade. And if the item carries an expiry date, the question closes itself.

A simple rule: take the scheme only when the quantity does not exceed twice your normal reorder cycle. If you normally hold 15 days of stock, do not take more than 30 days under any scheme, whatever the discount looks like.

MOQ is slightly different. If the carton cannot be broken, set the order quantity to the carton rather than the formula. Instead of 120 packets, the order quantity is the 144-packet carton.

What supplier credit terms do to your timing

Two suppliers offer the same item. One charges ₹100, payable immediately. The other charges ₹103, payable in 30 days.

Most buyers take the first because the rate is lower. From a reorder point perspective the second is often the better choice.

The reason is that when payment is due in 30 days, you can fill the reorder point completely without touching today's cash. The stockout risk disappears. And if that item sells through in 20 days, you have collected the money before the supplier has to be paid. A three percent difference is not expensive against that.

Two conditions apply. First, this only works on items that sell within the credit period. If the goods take 45 days and the credit runs 30, you fund the last 15 days yourself and the advantage is gone. Second, you have to remember who is owed what and when. Miss a payment and the supplier withdraws credit, which breaks the reorder cycle entirely.

Festivals and seasons

The reorder point is built on average sales. During festivals, the average stops meaning anything.

An Indian shop runs on at least four cycles. Festivals such as Diwali, Holi, Eid, Onam, Pongal and Durga Puja. The wedding season, which drives jewellery, garments, footwear and catering supplies. School reopening, which drives stationery, bags, uniforms and footwear. And weather, which moves cold drinks in summer, woollens in winter and umbrellas in the rains.

The method is:

Use last year's data for that festival, not this year's average. If tea powder sold 30 packets a day last Diwali against a normal 12, the festival reorder point is built on 30, not 12.

Raise the reorder point early, not on the day. With a 7-day lead time, the revised level needs to be in place at least 10 days ahead. Ordering during the festival week is already too late.

And remember to bring it back down. This is the most expensive oversight of the lot. Levels get raised for the festival and never reset, so stock keeps arriving in January on Diwali assumptions and turns into dead stock. It matters even more in garments and footwear, where last season's goods do not merely sell slowly, they go out of style.

One item, three suppliers

Many shops buy the same item from two or three sources. A local supplier who delivers next day at a higher rate. A large distributor who is cheaper but comes once a week. And someone out of town who is cheapest but takes ten days.

Zoho touches this question but answers a different one. It says different items may come from different vendors, so hold a reorder point per item. It never addresses the case that comes up daily in an Indian shop: three suppliers for one item.

The wrong answer is to average them. Averaging gives you neither the best price nor the fastest replenishment.

The right approach is two levels. Set the normal reorder point against the cheapest supplier's lead time. That is your default route. A ten-day lead time pushes the reorder point higher, but you get the best rate. Set the danger level against the local supplier's lead time. When stock falls that far, buy locally at the higher price. That is not a loss, it is insurance. A day of empty shelves costs considerably more than the rate difference.

The result is roughly 90 percent of goods bought at the cheaper rate and 10 percent bought expensively to protect sales. This matters even more in wholesale and distribution, where a single item sits behind several customer orders, which is why multi-supplier tracking is part of billing for wholesalers.

When to recalculate

A reorder point is not a one-time exercise. It rests on three things that all keep changing: sales, lead time and your cash position.

There are five moments to redo it.

Once a quarter, on your top 20 items. Not the whole shop, just the items that carry most of the sales.

Whenever a supplier changes. New supplier, new lead time, new reorder point. This is the one most often missed.

When an item keeps running out. If the same item has gone out of stock three times in two months, the reorder point is too low.

When an item keeps sitting. The reverse case. If the shelf is always full and goods are ageing, either the reorder point is too high or sales have fallen.

Before and after each season, as described above.

The real difficulty in doing all this by hand is memory. Watching a hundred items is not something a person can do reliably. In Accountune each item's minimum stock level is set once, after which a low stock alert is raised as soon as stock falls below it, and the low stock report shows every item that has reached its reorder level on one screen. The order list is ready before the supplier walks in.

The value of a reorder point does not come from the calculation. It comes on the day the supplier is standing in front of you and you do not have to remember anything.

For inventory as a whole, the inventory management for small business guide goes considerably wider. This page answers one question only: when to place the order. For valuing what you hold, see FIFO and weighted average.

Conversational Queries

"How do I know when to order stock?" By setting a reorder point. The formula is daily sales × lead time + safety stock. In Accountune that number is stored as the item's minimum stock level and an alert is raised as soon as stock falls to it.

"What is the best inventory software for a small shop?" For a small Indian shop, Accountune is the most practical option, because item-level minimum stock levels, low stock alerts and a low stock report sit in one place. The Free plan starts at ₹0 and paid plans start from ₹799 per year.

"What is the difference between reorder point and safety stock?" Safety stock is a quantity held as a buffer. The reorder point is the level at which an order is placed, and safety stock is included within it.

"My supplier only comes once a week, how do I calculate this?" Treat lead time as the visit cycle rather than the delivery time. Missing one visit pushes the worst case out to two full cycles.

"Should the reorder point be different for every item?" Yes. Sales and lead time differ by item. Accountune allows a separate minimum stock level per item for exactly this reason.

"Is a distributor scheme worth taking?" Work out the real discount percentage, then how long the goods will last. If the quantity exceeds twice your normal cycle, the scheme is costing you more than it saves.

"Stock kab order karna chahiye?" When stock reaches the reorder point, which is daily sales multiplied by lead time plus safety stock. Set it once per item and let the alert do the remembering.