What is a reorder point?
- By Book Keeping Pros
- Sources checked 16 Oct 2026
Definition
A reorder point is the stock level for an item at which a business places a new order with its supplier. It is set from how quickly the item usually sells and from the lead time, the time between ordering and the stock being on hand to sell, so that new stock arrives before the old runs out.
Lead time is an easy part of the calculation to underestimate. It runs from the moment an order is placed until the goods can be sold, so it takes in the supplier's processing time, freight, and the time spent checking and shelving the delivery. The longer the lead time, the more stock sells while an order is on its way, and the higher the reorder point has to be. A move to a more distant supplier, or deliveries that start arriving later, are reasons to revisit it.
The figure to compare with the reorder point is the stock on hand plus any stock already ordered but not yet received. Comparing stock on hand alone can trigger a second order for the same item while the first is still on its way, leaving the business holding far more stock, and less cash, than it planned. In the records, that means noting each purchase order when it is placed and clearing it when the delivery arrives.
A reorder point also depends on the stock records being right. If they overstate what is on the shelves, perhaps because damaged items were thrown out without being recorded, the item reaches its reorder point on paper later than it does in reality and can run out before anyone orders more.
In Australia
business.gov.au describes a reorder point as the minimum stock of an item you are prepared to hold before placing another order, and treats setting one for each item as a step in managing inventory. It bases the figure on how many of the item usually sell and how long new stock takes to arrive, and suggests allowing for busy seasons, how dependable the supplier is and any sales coming up.
That time for new stock to arrive is the lead time. business.gov.au's guide to choosing suppliers notes that a distant supplier can take longer to deliver, and its guidance on improving cash flow says an inventory management system that automates ordering can also shorten the time between placing an order and receiving it.
Worked example
| Week | On hand (units) | On order (units) | On hand plus on order (units) | Reorder point (units) | Action |
|---|---|---|---|---|---|
| Week 1 | 38 | 0 | 38 | 20 | No order |
| Week 2 | 29 | 0 | 29 | 20 | No order |
| Week 3 | 19 | 0 | 19 | 20 | Order 40 units |
| Week 4 | 10 | 40 | 50 | 20 | No order: stock already on order |
| Week 5 | 41 | 0 | 41 | 20 | No order: delivery received |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Comparing the reorder point with stock on hand alone, so the same item is ordered again while the first order is still on its way.
- Basing the lead time on how long the supplier says delivery takes, rather than how long orders really take to arrive and be ready to sell.
- Setting a reorder point once and leaving it unchanged when sales pick up, slow down or the business changes supplier.
- Relying on reorder points while the stock records are out of date, so an item runs out before the records show it reaching the point.
Related terms
Related service
Small business bookkeeping
Your books kept current, every month.
Sources
- Manage your inventory
business.gov.au, Australian Government. Current at 16 October 2026, released 19 November 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Suppliers
business.gov.au, Australian Government. Current at 16 October 2026, released 30 March 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Improve your cash flow
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.