How much stock to order, and when
Order when stock falls to the reorder point, which is what you will sell during the supplier's lead time plus your safety stock, and order enough to cover the lead time plus the gap until your next order.
Most businesses run on “keep at least ten”. It is wrong in both directions at once, and it is worth ten minutes to understand why.
Why a flat minimum fails
"Reorder when it drops below ten" ignores the two things that actually decide the answer: how fast the line sells, and how long your supplier takes.
Ten units of something selling four a day is two and a half days of stock, and your supplier takes two weeks. Ten units of something selling one a month is nearly a year of cash sitting on a shelf. The same rule produced both.
The three numbers you need
Average daily demand. How many you sell a day, measured over long enough to average out good and bad weeks. Ninety days is a sensible window for most stock.
Lead time. Days from placing the order to having it on the shelf. Be honest about this one. It is when you can sell it, not when the supplier says they shipped it.
How evenly it sells. A line selling exactly one a day is predictable. A line selling thirty on a Friday and nothing all week has the same average and is a completely different planning problem.
The reorder point
reorder point = daily demand × lead time + safety stock
The first part is what you will sell while you wait. If you sell 4 a day and the supplier takes 14 days, you need 56 units just to trade through the wait. Drop below that and you will be out of stock before the order lands, whatever you do next.
Safety stock
Safety stock covers the weeks that run busier than average. The formula worth using takes account of how much demand actually varies:
safety stock = z × (standard deviation of daily demand) × √(lead time)
z comes from your target service level, meaning how often you intend to have stock when somebody asks for it. 95% is the usual trade-off in retail and gives z = 1.65. Higher service costs more stock and it gets expensive quickly: going from 95% to 99.9% roughly doubles your safety stock to remove a small remaining risk.
The important part is that a steady line needs very little and a spiky one needs a lot. Adding a flat 20% to everything gets both wrong.
How much to order
order-up-to level = daily demand × (lead time + time until your next order) + safety stock
order quantity = order-up-to level − (stock on hand + stock on order)
That last subtraction is the one people forget, and it is how a business ends up with sixty of something it needed twenty of.
A worked example
A shop sells an average of 1.4 of a handset a day, fairly steadily. The supplier takes 14 days. They place orders weekly. Today they hold 18, with 10 on order.
Reorder point: 1.4 × 14 = 20, plus safety stock of around 5, so 25.
They have 18 + 10 = 28, which is above 25, so no order goes in this week.
Next week, having sold 10 more, they are at 18. The order-up-to level is 1.4 × (14 + 7) + 5 = 34, so they order 16.
The other half: what to stop ordering
Ordering well also means not ordering. Stock that has not sold in ninety days is not inventory, it is cash in a box, and the answer is usually to discount it rather than buy it company.
Doing this in StockRada
StockRada works all of this out from what you have already been recording, meaning sales, stock on hand and what is on order, and tells you what to order and when. It also suggests moving stock between branches before you buy any.
Questions people ask
What is a reorder point?
The stock level at which you should place an order. It is what you will sell during the supplier's lead time, plus safety stock. Drop below it and you will run out before the new order arrives.
How do I calculate safety stock?
Multiply the standard deviation of daily demand by the square root of the lead time, then by a factor for your target service level, which is 1.65 for 95%. A steady line needs very little. An uneven one needs a lot.
How much stock should I order?
Enough to cover the lead time plus the gap until your next order, plus safety stock, minus what you are already holding and what is already on order. Forgetting that last subtraction is the most common way to over-order.