Stockouts rarely happen because someone forgot to reorder. They happen because there was never a clear number telling anyone when to reorder in the first place. Without that number, restocking becomes a feeling. Someone glances at a shelf, or scrolls through Shopify’s dashboard, and makes a judgment call. That works fine when you have a handful of SKUs and a lot of spare attention. It stops working the moment either of those things changes.
The reorder point formula fixes this by turning “when should we reorder” into a specific, calculable threshold. Once you have it dialed in for a SKU, you are not guessing anymore. You are watching a number, and when it hits the floor, you order.
Why this matters more than it looks like it should
Inventory timing is one of those things that seems minor until you zoom out. Order too much and you tie up cash in storage, insurance, and product that might not sell before it goes out of season or out of style. Order too little and you are losing sales you already earned through marketing and traffic, right at the moment a customer was ready to buy.
The macro data backs this up. U.S. Census Bureau figures on retail inventory-to-sales ratios show just how much this shifts over time. That ratio sat at 1.45 in 2019, spiked to 1.68 in 2020 as supply chains broke down everywhere, then tightened back to 1.26 by 2022 as businesses got sharper about matching stock to demand. The businesses managing that tightening well were not guessing. They had a system.
The formula
The reorder point formula has two parts:
Reorder Point = Lead Time Demand + Safety Stock
Here is what goes into each piece.
Lead time demand
This is how much of a SKU you expect to sell during the time it takes to get more of it.
Lead Time Demand = Average Daily Sales × Lead Time (in days)
- Average daily sales is your total units sold over a period, divided by the number of days in that period. Sell 300 units in 30 days, and your average daily sales is 10.
- Lead time is the number of days between placing a purchase order and having that stock ready to sell, not just ready to ship from the supplier. If customs, receiving, and prep add time, that time belongs in the lead time number too.
If you sell 10 units a day and your lead time is 14 days, your lead time demand is 140 units. That is how much you would sell before a new order could possibly arrive, assuming everything goes exactly as planned.
Safety stock
Nothing goes exactly as planned every time, which is what safety stock is for. It is the cushion that covers you when demand spikes higher than average, or your supplier runs later than usual.
A straightforward way to calculate it:
Safety Stock = (Maximum Daily Sales × Maximum Lead Time) − (Average Daily Sales × Average Lead Time)
Using the same SKU: say your highest single-day sales in the last few months was 18 units, and the longest a supplier shipment has taken was 20 days.
Safety Stock = (18 × 20) − (10 × 14) = 360 − 140 = 220 units
Putting it together
Reorder Point = 140 (lead time demand) + 220 (safety stock) = 360 units
Once this SKU’s stock hits 360, it is time to reorder, not when it hits zero, and not when someone happens to notice it is getting low.
Where this breaks down if you are not careful
Using one blanket number for every SKU. A fast mover with unpredictable spikes and a slow, steady seller do not need the same safety stock cushion. Calculate this per SKU, not as a single company-wide rule of thumb.
Ignoring seasonality. A reorder point built from average sales in March will not hold in November. Products with real seasonal swings need separate reorder points for their peak and off-peak periods, not one annual average stretched across both.
Treating lead time as fixed. Lead time is rarely one number. Track it across your last several purchase orders and use the real range, not the number your supplier quoted you a year ago.
Setting it once and never touching it again. A reorder point calculated when you were selling 5 units a day is meaningless once you are selling 20. Revisit these numbers on a schedule, the same way you would revisit inventory buffers.
Calculating it per warehouse if you use more than one. A single blended reorder point across two locations hides the reality that one location might be running dangerously low while the other looks fine on paper.
Why this pairs with your inventory buffer
If you read the last post on setting inventory buffers in Shopify, this is the other half of that system. A buffer protects the last few units of stock from being sold out from under you. The reorder point tells you when to get more before you rely on that buffer at all. Together, they cover both ends of the same problem: not selling what you do not have, and not running out of what you are selling.
If you want to see where reorder points fit into the bigger picture of scaling fulfillment without losing control, the workbook walks through the full diagnostic. Get the Fulfillment Fix
Related reading: [How to Set Inventory Buffers in Shopify So You Stop Overselling] · [Selling on Shopify, Amazon, and Wholesale? Here’s Why Your Inventory Doesn’t Match] · [What Reporting You Should Look For in a 3PL]