What is the Reorder Point Formula?

The formula is: (Average Daily Sales x Lead Time in Days) + Safety Stock. This calculation tells you exactly when you need to place your next order to avoid running out of stock.

What is Safety Stock?

Safety stock is extra inventory held to protect against surges in demand or delays in shipping. It acts as an insurance policy. If your supplier is late, you dip into safety stock instead of going out of stock.

How does inventory affect Amazon IPI score?

Your Inventory Performance Index (IPI) score drops if you hold 'Excess Inventory' (over 90 days supply) or if you have 'Stranded Inventory.' A low IPI score can lead to storage limits and higher fees.

Inventory Management 101: The Ultimate Guide to Forecasting & Reordering

Inventory is a liability until it is sold. It is cash sitting in a cardboard box.

Buy too little, and you trigger the "Stockout Death Spiral" where your Amazon ranking plummets. Buy too much, and "Aged Inventory Surcharges" will eat your profit margins alive.

Inventory management is the art of walking this tightrope. It is not about guessing; it is about math. In this guide, we will break down the exact formulas for Reorder Points, Safety Stock, and Lead Time calculation to keep your cash flow healthy.

The Two Risks: Stockouts vs. Overstocking

Before we do the math, you must understand the consequences.

Stockout

The Cost: Zero revenue.
The Hidden Cost: Amazon's algorithm punishes you. If you have no stock, you lose your keyword ranking. When you finally restock, you have to spend heavily on ads to regain your position.

Overstock

The Cost: Tied up cash flow.
The Hidden Cost: Storage fees. Amazon charges 3x fees for items older than 180 days. Plus, your IPI (Inventory Performance Index) score drops, limiting your ability to send in new products.

Metric 1: Calculating True Lead Time

Most beginners think Lead Time is just "Shipping Time." This is a fatal error.

Lead Time is the total time from the moment you wire the deposit to the moment the unit is available for sale.

Manufacturing: 20-30 Days.
Quality Inspection: 3 Days.
Freight (Sea): 30-40 Days.
Customs Clearance: 5 Days.
Amazon Check-In: 7-14 Days (This is the one people forget!).

Total Lead Time: ~90 Days.

This means you must place your order when you still have 3 months of inventory left. If you wait until you have 1 month left, you will be out of stock for 60 days.

Metric 2: Safety Stock (The Insurance Policy)

What if the ship gets stuck? What if customs holds your container for an exam? What if you have a viral TikTok video and sales double?

You need Safety Stock. This is buffer inventory held to protect against uncertainty.

A good rule of thumb for beginners is 14 Days of Sales.

If you sell 10 units a day, keep 140 units as a "Do Not Touch" buffer. Only dip into this if the shipment is late.

The Golden Formula: The Reorder Point

You don't reorder based on "feeling." You reorder when your stock hits a specific number.

Reorder Point Formula

(Avg Daily Sales x Lead Time) + Safety Stock

Example Scenario

Daily Sales: 20 units
Lead Time: 60 days
Safety Stock: 14 days (280 units)

Calculation: (20 x 60) + 280 = 1,480 Units.

The Strategy: As soon as your inventory level (Available + Inbound) hits 1,480, you wire the money to your supplier immediately.

ABC Analysis: Prioritize Your Portfolio

Not all products deserve the same attention. Use the Pareto Principle (80/20 rule).

A-Items (The Moneymakers): Top 20% of products that bring 80% of revenue. Never stock out. Keep high safety stock. Check daily.
B-Items (Steady Sellers): Moderate volume. Check weekly. Standard safety stock.
C-Items (The Duds): Low volume. Low profit. Consider liquidating these to free up cash for A-Items. Do not reorder until fully sold out.

Forecasting Seasonality (The Q4 Trap)

A common mistake is using your "Average Daily Sales" from November to calculate your reorder for February.

Q4 (Oct-Dec) sales are often 3x higher than Q1 (Jan-Mar).

If you reorder based on December sales velocity, you will be massively overstocked in January. You will pay storage fees on that stock until next Christmas. Always adjust your daily sales forecast based on the upcoming season, not the past season.

FAQ

What is MOQ?

Minimum Order Quantity. Factories won't turn on their machines for 50 units. Usually, MOQ is 500 or 1000 units. You must balance your Reorder Point calculation against the supplier's MOQ. If your math says "Order 200" but MOQ is 500, you have to order 500.

How do I improve my Amazon IPI Score?

Amazon gives you a score (0-1000) based on how efficient your inventory is. To improve it:
1. Sell through inventory faster (increase sell-through rate).
2. Remove "Stranded Inventory" (fix listing errors).
3. Avoid "Excess Inventory" (stock older than 90 days).

Should I use a 3PL?

A Third-Party Logistics (3PL) warehouse is cheaper than Amazon for long-term storage.
Strategy: Send 3 months of stock to Amazon FBA. Keep the other 3 months at a cheap 3PL. Drip-feed stock into Amazon as needed. This keeps your Amazon storage fees low and your IPI score high.

Conclusion

Inventory management is boring, unsexy, and absolutely critical.

The businesses that fail in year 2 usually fail because they ran out of cash buying inventory they couldn't sell fast enough.

Your Action Step: Open a spreadsheet. List your top 3 products. Calculate the precise Reorder Point for each one today. If you are below that number, place an order now.

Inventory Management 101: How Much Stock Should You Buy?