Reorder Points and EOQ: The Two Formulas That Tell You When and How Much to Reorder

Two formulas answer the only two replenishment questions that matter. The reorder point tells you when to place a purchase order; economic order quantity (EOQ) tells you how much to buy. Reorder point = (average daily demand × lead time in days) + safety stock. EOQ = the square root of (2 × annual demand × order cost) ÷ annual holding cost per unit.

Most ecommerce brands reorder on instinct and a spreadsheet glance. These two formulas replace the guess with a number you can defend — and they take about fifteen minutes per SKU to set up.

How do you calculate a reorder point?

Three inputs:

• Average daily demand — units sold per day over a representative window (90 days is a reasonable default; use a longer window for seasonal SKUs).
• Lead time — the full elapsed time from placing the PO to the units being sellable. This is the input brands get wrong most often; see below.
• Safety stock — buffer against demand and lead-time variability. Method in our safety stock guide.

Worked example

A skincare brand sells an average of 42 units a day of its hero SKU. Total lead time from the contract manufacturer, including ocean transit and warehouse receiving, is 45 days. Safety stock is set at 600 units.

Reorder point = (42 × 45) + 600 = 2,490 units.

When on-hand sellable inventory drops to 2,490, the PO goes out. Not when it "looks low."

Why lead time is usually understated

Brands typically use the supplier's quoted production time and stop there. Real lead time is the sum of: PO issuance and supplier confirmation, production, QC, freight booking, transit, customs clearance, drayage, and — the commonly forgotten one — 3PL receiving and putaway, which can take several business days from truck arrival to sellable status. Understate lead time by a week and your reorder point is short by a week of demand.

How do you calculate economic order quantity?

EOQ finds the order size where ordering cost and holding cost balance. Order too small and you reorder constantly, paying the fixed cost each time. Order too large and you pay storage and tie up cash.

EOQ = √((2 × D × S) ÷ H)

• D = annual demand in units
• S = fixed cost per order (PO admin, freight booking, inbound freight, receiving fees)
• H = annual holding cost per unit (storage + capital cost + shrink and obsolescence risk)

Worked example

Same SKU: annual demand 15,330 units (42/day). Fixed cost per order, including inbound freight and receiving, is $2,400. Annual holding cost works out to $3.50 per unit.

EOQ = √((2 × 15,330 × 2,400) ÷ 3.50) = √21,022,286 ≈ 4,585 units, or roughly 3.3 orders a year.

Where EOQ breaks down

EOQ assumes steady demand, a fixed order cost, and no quantity discounts. Real ecommerce violates all three. Use it as a starting range, then adjust for:

• Supplier MOQs and case packs — round to a full case or pallet layer, which also keeps your storage footprint efficient.
• Volume price breaks — a 10% unit discount often beats the holding cost of the extra inventory.
• Seasonality — run the numbers separately for peak. Q4 demand is not the annual average. See demand planning for ecommerce.
• Shelf life — never order past expiry or style season, whatever EOQ says.

Which SKUs deserve this treatment?

Not all of them. Run reorder points and EOQ on your A items — the roughly 20% of SKUs driving 80% of revenue. Set simple min/max rules for C items. The classification method is in ABC inventory analysis.

What breaks a reorder point in practice?

Three things, in order of frequency:

1. Inaccurate on-hand counts. A reorder point triggered off a wrong number is worse than no reorder point. Fix counts first with cycle counting and reconciliation between your store, ERP, and 3PL.
2. Stale demand averages. Recalculate monthly. A SKU that went viral in August will blow through a July-based reorder point.
3. Lead time drift. Supplier and freight lead times move. Track actuals, not quotes.

Frequently asked questions

What is the difference between reorder point and safety stock?

Safety stock is the buffer. The reorder point is the trigger level, and it includes safety stock inside it. You never intend to consume safety stock — it is there for the weeks you do.

Should reorder points include in-transit inventory?

Compare your reorder point against inventory position — on-hand plus on-order minus backorders — not against on-hand alone. Otherwise you will double-order during a long lead time.

Does EOQ still apply if my supplier has a high MOQ?

Yes, as a reference. If EOQ comes out below the MOQ, the MOQ wins — but knowing the gap tells you how much excess holding cost that supplier relationship is costing you.

How often should I recalculate?

Reorder points monthly for A items. EOQ quarterly, or whenever freight costs or supplier terms change materially.

Atomix Logistics gives brands real-time sellable inventory counts and fast receiving, so your reorder points trigger off numbers you can trust. Reach out for a quote.