A lot of small businesses handle inventory reordering by feel — someone notices a SKU is getting low and places an order, roughly when it seems like the right time. That approach tends to swing between two failure modes: stocking out because the reorder happened too late, or tying up cash in excess inventory because it happened too early out of caution.
The actual formula
Reorder point is calculated as average daily sales multiplied by lead time in days, plus a safety stock buffer for demand variability. In plain terms: how much do you typically sell in a day, how many days does it take a new order to arrive, and how much extra cushion do you want for the weeks that sell faster than average.
Why lead time is the number most businesses get wrong
Lead time isn't just shipping time from the supplier — it's the full time from noticing you need to reorder to the product being sellable, including any processing, receiving, and putaway time on your end. Underestimating lead time is one of the most common causes of stockouts, because the reorder point calculated from an optimistic lead time triggers too late relative to when the business actually needs the stock.
Why true margin per unit matters as much as the reorder timing
Reorder point answers "when" — but landed cost per unit, including freight and any other acquisition costs beyond the base unit price, answers whether reordering that SKU is actually still profitable at current pricing. A SKU that's technically due for reorder but has a shrinking true margin, because freight costs crept up since the last order, is worth a pricing look before simply reordering the same quantity at the same price.