2 min read
The cost of getting stock timing wrong
Stockouts cost sales and customer goodwill; overstocking ties up working capital and creates storage costs, spoilage risk and obsolescence. Both failures are common in growing product businesses, and both stem from the same root cause: reorder decisions made by instinct rather than calculation. This planner replaces instinct with a repeatable process.
Step 1 — Establish demand rate and lead time per SKU
For each stock-keeping unit, calculate your average daily or weekly sales volume using the last ninety days of sales data. Then confirm the supplier lead time — the number of days between placing an order and receiving usable stock. Both figures should reflect realistic performance, not best case; if lead times are variable, use the 80th percentile (the time within which 80 % of orders actually arrive).
- Average daily demand (units sold ÷ days in period)
- Supplier lead time in days (use realistic, not best-case)
- Lead time demand = average daily demand × lead time days
Step 2 — Calculate safety stock
Safety stock is buffer stock held to absorb demand spikes or supplier delays. A simple calculation: (maximum daily demand minus average daily demand) × maximum lead time. This ensures you have stock available even if both demand is unusually high and the supplier is unusually slow simultaneously.
For fast-moving or margin-critical lines, err toward higher safety stock. For slow-moving or bulky items, a lower buffer may be appropriate to limit capital tie-up.
Step 3 — Set your reorder point
Reorder point = lead time demand + safety stock. When your stock level reaches this number, trigger a replenishment order. In practice, this means checking stock levels against reorder points at a defined frequency — daily for fast-moving items, weekly for slower lines.
Record reorder points in your inventory system or on a simple tracking spreadsheet. Review and update them quarterly or whenever your demand pattern or supplier lead times change materially.
Working capital implications
The sum of your safety stock and average cycle stock across all SKUs represents the minimum working capital tied up in inventory at any time. If this figure is constraining your ability to fund growth, a revolving stock finance facility or short-term business loan may release capacity — any such figures would be illustrative subject to full credit assessment, not an offer. Conversely, if this planner reveals that you are holding significantly more stock than your reorder calculations require, releasing that capital through a stock reduction programme may be the lower-cost option.
Frequently asked questions
Does this approach work for businesses with highly seasonal demand?
The same framework applies, but average daily demand should be calculated separately for peak and off-peak periods, with different reorder points set for each. Building safety stock ahead of a peak season also requires a separate pre-season stock build calculation.
What if I have multiple suppliers for the same SKU?
Calculate lead time using the supplier you would realistically use as primary. Where a secondary supplier provides genuine supply security, their availability may allow you to hold lower safety stock, but only if you can switch quickly and without quality risk.
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