Every stockout starts the same way. Somebody looked at a shelf and thought, "eh, we've got enough," and went back to whatever they were doing. Then, three weeks later, there's a backorder queue.
Two formulas fix this permanently. The reorder point tells you exactly when to order. And the economic order quantity (EOQ) tells you exactly how much. Neither requires anything fancier than your sales history and a calculator, and once they're set, a system can run them for you.
What is a reorder point?
A reorder point (ROP) is the inventory level that triggers a new purchase order. So when stock for an item drops to its reorder point, you order more.
The level is calculated so the replenishment arrives just before you'd run out, accounting for how fast the item sells and how long the supplier takes to deliver.
The reorder point formula
Reorder Point = (Average Daily Usage × Lead Time in Days) + Safety Stock
The formula requires three inputs, but don't worry - you likely already have all of them on hand:
- Average daily usage = Units sold per day, averaged over a recent representative period (30 to 90 days works for most products)
- Lead time = Days between placing a purchase order and stock being shelf ready. (Use the supplier's actual average, not the one printed on their rate card)
- Safety stock = Your protection against demand increases and late deliveries
Reorder point example
Let's say you sell 20 units a day of a phone case. Your supplier takes 10 days to deliver, and you hold 100 units of safety stock. (This is just an example here, the safety stock section below shows how you'd actually derive one).
Reorder point = (20 × 10) + 100 = 300 units
When stock hits 300, it’s easy … you reorder. The 200 units of lead-time demand sell through while the shipment is in transit, and the 100 units buffer covers you if either number acts up.
The safety stock formula that most SMB ops use
The safety stock formula version most small-to-medium-sized (SMB) operations use is:
Safety Stock = (Max Daily Usage × Max Lead Time) − (Average Daily Usage × Average Lead Time)
For an example of this formula, let’s still use our phone case: If usage peaks at 30 units a day and lead time has stretched to 12 days before.
Safety stock = (30 × 12) − (20 × 10) = 360 − 200 = 160 units
Why SMBs love this formula: The formula centers more around the idea of pragmatism over perfection. Small to medium-sized businesses usually default to this formula because it is the ideal balance between minimal effort and immediate protection.
And, lastly, one thing worth noting is that a reorder point will fall if daily usage drops, lead time shortens, or you decide to carry less safety stock.
Faster suppliers literally lower the amount of inventory you need to hold.
What is economic order quantity (EOQ)?
Economic order quantity (EOQ) is the order size that minimizes your total inventory cost.
Why EOQ is important: Order too little and you pay ordering costs (freight, processing, receiving labor) again and again. Order too much, and you drown in holding costs (storage, capital, insurance, obsolescence).
EOQ finds the bottom of that cost curve.
The EOQ formula
EOQ = √(2DS / H)
Where:
- D = Annual demand in units
- S = Cost per order (fixed cost of placing and receiving one order)
- H = Annual holding cost per unit
EOQ formula example
Okay, back to the phone case again. Let's say that annual demand is 7,300 units (20 a day). And each purchase order costs $50 to place and receive. Holding one unit for a year costs $2.
EOQ = √(2 × 7,300 × 50 ÷ 2) = √365,000 ≈ 604 units
Therefore, the EOQ formula shows us that the cheapest way to buy 7,300 units a year is roughly 12 orders of 604 units, not two giant orders or fifty tiny ones.
Here's where EOQ gets wobbly
EOQ assumes a steady demand, fixed costs, and no quantity discounts. But as we all know, real life is not so predictable. To help counter the wobbliness, it helps to treat the calculated value as a strong default, and then adjust for supplier minimums, container quantities, price breaks, and seasonality.
But even with all that said and done, a formula that says "order 604" is still useful no matter what when the supplier's case pack means you order 600.
It's also important to remember that this formula is just a compass … and not a GPS.
How ROP and EOQ work together
The two answer different questions, and they're better as a pair.
The reorder point watches the calendar, and EOQ watches the cost curve.
How it works: Stock drops to the ROP (when), and the purchase order you cut is for the EOQ (how much).
Together, they keep you off both failure modes: The stockout that creates backorders and the over-buy that eats your storage budget.
Doing this for 40 SKUs vs. 4,000
The math is easy for one product. It gets real tough when you are looking across a product catalog. That’s because usage rates drift, lead times change, and nobody recalculates spreadsheet formulas on a strict schedule.
Time is money - and that’s exactly why software like Zenventory can be such a time (and money) saver. Zenventory handles reorder points and PAR levels per item and per warehouse and fires an email or SMS the moment stock crosses the threshold.
Setting reorder triggers is also one of the nine procedures in our inventory control procedures playbook, if you're building out the full SOP set.
And since replenishment decisions are only as good as the stock counts behind them, real-time inventory and order management is the foundation the formulas sit on.
See how Zenventory handles reorder points >>
FAQ
How do you calculate a reorder point?
You can calculate a reorder point by multiplying the average daily usage by supplier lead time in days, then add safety stock. For example, an item selling 20 units a day with a 10-day lead time and 100 units of safety stock has a reorder point of 300 units.
What is a good reorder point?
Yeah, here's the thing: There is no universal number. A good reorder point covers expected demand during lead time plus enough buffer that a normal demand spike or shipping delay doesn't cause a stockout. Review the inputs quarterly, since usage and lead times drift.
What is the EOQ formula?
The formula is EOQ = √(2DS / H), where D = annual demand in units, S is the fixed cost per order, and H is the annual holding cost per unit. The result is the order quantity that minimizes combined ordering and holding costs.
Is EOQ still relevant for e-commerce?
Yes … with adjustments. The formula's assumptions (constant demand, fixed costs) rarely hold perfectly, but EOQ remains the best starting point for order sizing. Most operations calculate EOQ, then round to supplier case packs and adjust for promotions and seasonality.
Can reorder points be automated?
Yes. A WMS or inventory management system tracks stock in real time, compares each item against its reorder point, and sends alerts or generates purchase orders automatically. Automation removes the main failure mode of manual systems: nobody checking the shelf.
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