Reorder points and order sizes for a small shop
How a shop decides when to reorder and how much, using the economic order quantity and a reorder point, and what its system can do about it today.
By Achekam · · 5 min read · For Retail businesses in South Africa, Nigeria, Kenya
A hardware shop owner places orders the way many do: when a shelf looks thin, he phones the supplier and orders "the usual". Some months the storeroom is so full that boxes block the back door. Other months the shop runs out of the most popular paint colour on a Saturday morning and customers walk across the road.
Both problems come from the same gap: no rule for when to reorder and how much. There is a classic pair of tools for exactly this, the economic order quantity and the reorder point. Neither is perfect, but together they replace guesswork with a method. This article explains both in plain terms, where they break down, and how to put them to work with the system the shop has today.
How much to order: the EOQ
Investopedia defines the economic order quantity as an inventory management formula businesses use to find the ideal order size, the one that minimises the total cost of ordering, receiving and holding stock.
The idea is a trade-off. Ordering often in small amounts keeps the storeroom light but means paying the cost of placing, delivering and checking an order many times. Ordering rarely in large amounts saves on those costs but ties up cash and space in stock that sits on the shelf.
Investopedia gives the formula as:
Q = the square root of (2DS / H)
where:
- D is demand in units, typically for a year;
- S is the cost of placing one order, such as staff time, delivery charges and checking the delivery;
- H is the cost of holding one unit for a year, such as storage space, insurance, damage and the cash tied up.
A worked example in words: for a paint colour that sells steadily all year, the owner estimates the year's sales in tins, the cost of placing and receiving one order, and the cost of keeping one tin on the shelf for a year. Put those three into the formula, and the answer is the number of tins to order each time. The estimates do not need to be precise; rough, honest figures give a far better answer than "the usual".
Where the formula breaks down
Investopedia notes that EOQ assumes constant demand and constant ordering and holding costs. It cannot account for changing demand, seasonal cost changes, lost sales from shortages, or discounts for buying in larger quantities.
That rules it out, or at least calls for judgement, in several common retail situations:
- seasonal lines, such as school uniforms, braais and heaters, or festive stock;
- new products, where nobody knows the demand yet;
- supplier deals, where a bigger order earns a lower price.
On the last point, ACCA explains how to evaluate a bulk discount: compare the total annual cost of holding, re-ordering and purchasing at the EOQ and at the order level where the discount becomes available, and consider whether the larger orders can actually be stored. A cheaper price is no saving if the extra boxes end up in the owner's garage.
When to order: the reorder point
The EOQ says how much. The reorder point says when. Investopedia describes a shortage cost as the revenue lost because a business does not have enough stock to fill an order, and explains that setting a reorder point helps a business avoid running out.
ACCA explains that, with constant demand and a fixed lead time, the re-order level equals demand during the lead time. Its example: where the lead time is five days and daily demand is 30 units, the re-order level is 150 units. When stock falls to that level, the order goes in, and the new stock arrives just as the last unit sells.
Real demand is rarely constant, and suppliers are sometimes late. ACCA defines buffer inventory as the amount by which the re-order level exceeds average demand in the lead time, needed when lead-time demand is uncertain, to reduce the chance and cost of running out. In practice:
- Work out average daily sales for the line.
- Multiply by the supplier's usual lead time in days.
- Add a buffer, larger for lines that sell unevenly or suppliers who are unreliable.
- The total is the reorder point.
ACCA's article on inventory control explains economic order quantity, re-order levels and the practical side of managing stock.
What Achekam does today, and the list you keep yourself
There is a limitation to know about. In Achekam, a product's reorder level cannot be changed by any screen, so low-stock flags use a fixed default. That default will not match the reorder points you have just worked out, so treat the flag as a general prompt, not as your reorder rule.
Keep your own reorder list instead. A simple spreadsheet with one row per important product works well:
| Product | Reorder point | Order quantity | Supplier | Lead time |
|---|---|---|---|---|
| Each fast-moving line | From the steps above | From the EOQ, adjusted for seasons and deals | Main supplier | Usual days to deliver |
Check stock against the list on a fixed day each week. Start with the lines that matter most: the bestsellers and the ones customers complain about when they run out. Make sure deliveries actually add to stock in the system, or the comparison will be wrong; see when deliveries do not add stock.
From reorder list to purchase order
When a line reaches its reorder point, the order should follow a path that is controlled, not a phone call from the shop floor.
In Achekam, staff can raise a purchase requisition saying what is needed, why and the estimated cost, and someone other than the requester approves or declines it. A purchase order is then raised from the selected quotation of an approved requisition. The person who raised the order cannot approve it, and an approved order can be cancelled with a reason.
So the weekly routine becomes: check the list, raise requisitions for lines at or below their reorder point using the order quantity from the list, have them approved, and turn them into orders. How stock purchases then reach the inventory account is covered in stock purchases to inventory.
Pick your ten best-selling lines this week, work out a reorder point and order quantity for each, and put them in the list before the next order goes out.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
