Lesson 3 of 4

Re-order points: when to order

A shop that waits for the shelf to empty before ordering has already lost sales. New stock takes time to arrive. The skill is to order early enough that the new stock lands before the old stock runs out, without ordering so much that cash gets stuck on the shelf.

The re-order point

A re-order point is the stock level that tells you to place an order now. When the stock on hand drops to that number, or below it, you order.

Stock on hand means what you really have in the shop and back room. Stock that has been ordered but has not arrived yet is not on hand, so do not count it.

To set a re-order point you need three things.

  • Daily sales: how many units you sell on an ordinary day.
  • Lead time: the number of days between you placing the order and the stock being ready to sell. Count the supplier's packing, the delivery and the time it takes to unpack and shelve.
  • Safety buffer: a small extra amount for a busy week or a late delivery.

Re-order point = (daily sales × lead time) + safety buffer

Example

Example numbers only. A shop sells 4 bags of maize meal a day. Orders take 5 days to arrive. The owner adds a safety buffer of 8 bags.

Re-order point = (4 × 5) + 8 = 20 + 8 = 28 bags.

When the shelf and back room together hold 28 bags, place the order. During the 5 days it takes to arrive, about 20 bags will be sold, and the 8 bag buffer is still there if the delivery is late.

Stock level falling to the re-order point, then new stock arriving A line chart. Stock falls day by day until it reaches the re-order point of 28. An order is placed. During the 5 days of lead time stock keeps falling to the safety buffer of 8, then new stock arrives and the level jumps back up. Stock on hand (bags) Days Re-order point: 28 Safety buffer: 8 Order placed Lead time: 5 days New stock arrives
Order when stock reaches the re-order point. Stock keeps falling during the lead time, and the new delivery lands before the shelf is empty.

Where the numbers come from

  • Daily sales. Add up the units sold over a normal week and divide by the number of days you were open. A week of sales records or till slips will give you this.
  • Lead time. Look at your last few orders. Note the day each order was placed and the day the stock was ready to sell, and use the usual gap.
  • Safety buffer. Agree it with your manager. A product that sells fast or comes from a slow supplier needs a bigger buffer than a product that sells slowly and arrives reliably.

Timing matters in both directions

Order too late and the shelf is empty while customers are asking for the product. Order too early, or too much, and cash is tied up in stock that sits for weeks and may spoil or expire. The re-order point is there to find the middle.

Keep the numbers current

Daily sales and lead time change. A supplier may get slower, or a product may become more popular. Check your numbers regularly. Your count results matter too: if the record is wrong, the stock on hand is wrong, and the re-order decision is built on the wrong number. This is one more reason accurate counting matters.

Key points
  • Lead time runs from placing the order to stock on your shelf.
  • Re-order point = (daily sales × lead time) + safety buffer.
  • Order when stock on hand reaches the re-order point, not when the shelf is empty.
  • A wrong stock record gives a wrong re-order decision.