Inventory Math

Setting Reorder Points: Never Run Out of Inventory Again

You run out of materials mid-production. Or you overstock, tying up cash. Both happen because you don't know your reorder point. This guide teaches the formula, the discipline, and how to implement it so you always have materials when you need them—without overstock waste.

The Inventory Goldilocks Problem

Too little: Stockout. Production stops. Customers wait. You lose money.

Too much: Overstock. Cash tied up. Materials degrade. You lose money.

Just right: You reorder exactly when supply reaches a trigger point. Production never stops. Cash flows smoothly. You win.

Your reorder point is the trigger that makes "just right" possible.

The Reorder Point Formula

Reorder Point = (Daily Usage × Lead Time) + Safety Stock

Or in simpler terms:

RP = (Daily Usage × Days Until Arrives) + Buffer

Breaking Down Each Component

Daily Usage

How much of this material do you use per day, on average? Track for 30 days, divide by 30. Be honest about real usage, not theoretical.

Lead Time

How many days from when you place an order until it arrives? Includes processing, shipping, and any customs delays. Use the worst-case, not average.

Safety Stock

Extra buffer for unexpected surges or delays. Usually 1-2 weeks of usage. If you demand surges 20%, add extra safety stock.

Real Example: Jewelry Maker

Material: Gold-filled wire (0.8mm)

Daily Usage: 2 spools/day (based on 30-day tracking)

Lead Time: 5 days (supplier in California; 2-3 day shipping + processing)

Safety Stock: 2 weeks (14 days × 2 spools) = 28 spools

Calculation:

• Daily Usage × Lead Time = 2 × 5 = 10 spools
• Plus Safety Stock = 10 + 28 = 38 spools
• Reorder Point = 38 spools

Implementation: When inventory hits 38 spools, order more. By the time you've used those 38 (10 days at current usage), new stock arrives.

Handling Variable Demand

The formula above assumes consistent demand. But most handmade businesses have seasonal swings. Here's how to adjust:

Method 1: Use Peak-Season Usage

Calculate reorder points based on your busiest month, not average. During slow seasons, you'll build up a larger buffer (good). During peak seasons, you won't stockout (critical).

Method 2: Adjust Safety Stock by Season

Season	Usage Pattern	Safety Stock
Peak (Nov-Dec)	3× normal demand	4-6 weeks extra
High (May-Sep)	1.5× normal demand	2-3 weeks extra
Normal (Jan-Apr, Oct)	Baseline	1-2 weeks (standard)
Slow (Aug, Dec)	0.7× normal demand	1 week (minimum)

Adjust reorder points monthly as seasons shift. This prevents both stockouts during peaks and excess inventory during slow periods.

How to Implement Reorder Points (Step-by-Step)

1Track actual daily usage for 30 days

Don't estimate. Write it down. Get real data.

2Know your supplier lead times

Ask suppliers: "How long from order to delivery?" Use realistic numbers (add 1-2 days for safety).

3Calculate for each critical material

Do this for materials that, if you ran out, would stop production. Less critical items can use simpler approaches.

4Set up alerts

Use your inventory system (spreadsheet formula, tool, software) to alert when inventory hits the reorder point.

5Test for 2-3 months

See if your reorder point works. Did you stockout? Adjust down (you need higher RP). Did you accumulate excess? Adjust up (you need lower RP).

6Lock it in, review quarterly

Once it works, use it. Review quarterly to adjust for seasonal demand shifts.

Key Takeaways

The Formula Is Simple

Reorder Point = (Daily Usage × Lead Time) + Safety Stock. Anyone can calculate this.

Data Beats Intuition

Track actual usage. Know real lead times. Don't guess. Reorder points based on data prevent stockouts reliably.

Safety Stock Prevents Surprises

That 1-2 week buffer seems like waste until a supplier delays or demand spikes. Then it's a lifesaver.

Adjust for Seasonality

One static reorder point doesn't work for all seasons. Adjust safety stock as demand swings occur.

You might also be interested in these related articles about artisan business management.

Inventory Management Without the Chaos: Stock Tracking and Preventing Stockouts

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