Every shop owner knows the two ways stock goes wrong. A customer asks for a fast-moving item and the shelf is empty, so he walks to the next shop and may not come back. Or the godown is full of goods that move slowly while you are short of cash to pay suppliers. Reorder levels and safety stock are the tools that sit between these two problems.
The key terms
- Lead time: the number of days between placing an order and having the goods on your shelf.
- Average daily sales: how many units of an item you sell on a normal day.
- Safety stock: extra units kept to cover days when sales are higher or the supplier is late.
- [Reorder level](/glossary/reorder-level): the stock quantity at which you place a new order.
The basic formula is: Reorder level = (Average daily sales x Lead time in days) + Safety stock.
Worked example: cooking oil tins
A Bahawalpur grocery wholesaler sells an average of 12 tins of 5 litre cooking oil a day. The supplier usually delivers 4 days after the order. During those 4 days he expects to sell 12 x 4 = 48 tins. If he orders when stock falls to 48, the new delivery arrives just as the last tin goes, on a normal week.
But weeks are not always normal. Sales jump before Ramzan and Eid, and the supplier's truck may be held up. So he adds a safety stock of 2 days' sales: 12 x 2 = 24 tins. His reorder level becomes 48 + 24 = 72 tins.
Two ways to set safety stock
Method 1: Days of cover
Pick a number of days of extra stock based on how reliable the supplier is and how important the item is. As in the example above, 2 days of cover at 12 tins a day is 24 tins. This is simple and good enough for most items.
Method 2: Worst case minus normal
Look back at your sales and deliveries. Find the highest daily sales you have seen (excluding one-off bulk orders) and the longest lead time. Then: Safety stock = (Max daily sales x Max lead time) - (Average daily sales x Average lead time).
For the cooking oil: on busy days he has sold 18 tins, and the longest the supplier has taken is 6 days. Safety stock = 18 x 6 - 12 x 4 = 108 - 48 = 60 tins. Reorder level = 48 + 60 = 108 tins.
Method 2 gives much more safety stock because it plans for the worst sales day and the worst delay at the same time. Use it for items you cannot afford to run out of. Use Method 1 for everything else.
How much to order
The reorder level tells you when to order. You still need to decide how much. A simple approach is to order enough to cover the days until your next regular order. If you order oil once a week, order 12 x 7 = 84 tins each time. If the supplier gives a better rate for 100 tins, compare the saving with the cash tied up in the extra 16 tins before deciding.
A ready table for your top items
Here is how the same wholesaler set reorder levels for a few items using the days-of-cover method:
| Item | Avg daily sales | Lead time (days) | Lead-time demand | Safety stock | Reorder level |
|---|---|---|---|---|---|
| Sugar 50kg bag | 6 | 3 | 18 | 6 | 24 |
| Tea 950g pack | 20 | 5 | 100 | 30 | 130 |
| Soap carton | 3 | 7 | 21 | 6 | 27 |
| Rice 25kg bag | 4 | 2 | 8 | 4 | 12 |
| Cooking oil 5L tin | 12 | 4 | 48 | 24 | 72 |
Tea gets a larger safety stock because it is a top seller and the supplier is in another city. Rice has a short lead time from a local mill, so it needs only a small buffer.
Getting the inputs right
- Use recent sales. The last 4 to 8 weeks are a better guide than last year, unless the season matters.
- Remove one-off bulk orders. A single order of 200 tins from a caterer will inflate your average.
- Measure lead time honestly. Count from the day you placed the order to the day goods were on your shelf, not the day the supplier promised.
- Adjust for seasons. Raise levels before Ramzan, Eid, wedding season or school opening, depending on what you sell, and lower them afterwards.
Reorder levels with several locations
If you have a shop and a godown, set two kinds of levels. The godown's reorder level triggers a purchase from the supplier. The shop's level, sometimes called a par level, triggers a transfer from the godown, where the lead time is hours instead of days. Our guide on managing stock across warehouses explains transfers in detail.
What safety stock costs you
Safety stock is cash sitting on a shelf. It is worth knowing how much. Using the purchase prices below, here is the money tied up in the safety stock from the table above:
| Item | Safety stock | Purchase price (Rs) | Cash tied up (Rs) |
|---|---|---|---|
| Sugar 50kg bag | 6 | 7,000 | 42,000 |
| Tea 950g pack | 30 | 1,100 | 33,000 |
| Soap carton | 6 | 2,500 | 15,000 |
| Rice 25kg bag | 4 | 6,000 | 24,000 |
| Cooking oil 5L tin | 24 | 4,200 | 100,800 |
| Total | 214,800 |
Rs 214,800 is a reasonable price to avoid empty shelves on five of your best sellers. But if you used the worst-case method for the cooking oil, its safety stock would be 60 tins, or 60 x 4,200 = Rs 252,000 on one item alone. That is why the heavier method should be kept for the few items where running out would really hurt.
Do not do this for every item at once
A shop with 2,000 items does not need 2,000 carefully calculated levels on day one. Start with your top 50 items by sales value; these usually account for a large share of your sales. Give each one a unique SKU so the sales history is clean. Review those levels every month. For slow items, a rough level is fine.
Common mistakes
- Setting levels once and never reviewing them while sales change.
- Using the same safety stock for every item regardless of how fast it sells.
- Setting levels on items that are being phased out, which keeps dead stock coming in.
- Ignoring stock that is damaged or reserved for a customer order when checking against the level.
Let the system watch the levels
Calculating levels is a one-time job each month. Checking stock against them every day is the hard part. Inventory management software can compare current stock with each item's level and show a low-stock list every morning. In Taajir, stock updates with every sale, purchase and transfer, so the list reflects what is really on the shelf. Turn that list into purchase orders, and running out of your best sellers becomes rare.