Running out of a best-selling product is a direct loss of revenue. In a competitive market, a customer who finds an empty shelf will quickly move to a competitor.
However, overstocking fast-moving goods creates a different crisis. It ties up critical working capital in inventory, leaving the business with insufficient cash for payroll, rent or emergency expenses.
The goal is to find the reorder level: the precise point where you trigger a new purchase to ensure stock arrives just as the current batch runs low.
The reorder level calculation
Setting a reorder level requires three specific pieces of data: average daily usage, lead time and safety stock.
Average daily usage is the number of units sold per day. This is calculated by dividing total sales of a product over a month by the number of operating days.
Lead time is the number of days it takes from the moment you place an order until the goods are available for sale in your store.
Safety stock is the buffer held to protect against unexpected demand spikes or supplier delays. This is critical for SMEs dealing with port congestion or erratic transport networks.
The formula is: (Average Daily Usage × Lead Time) + Safety Stock = Reorder Level.
Practical SME example
Consider a Lagos-based distributor of a fast-moving lubricant. The business sells an average of 20 units per day.
The supplier takes 7 days to deliver the order after payment is confirmed. The owner keeps a safety stock of 50 units to account for potential delays at the warehouse or during transit.
The calculation is (20 units × 7 days) + 50 units. The reorder level is 190 units.
The owner must place a new order the moment the stock drops to 190 units. Ordering any later risks a stockout. Ordering earlier ties up cash unnecessarily.
Common inventory mistakes
Many founders rely on intuition rather than data. This often leads to “panic buying” when stocks are nearly empty, which usually involves paying higher rush shipping fees or buying from more expensive middlemen.
Another error is applying the same safety stock level to every product. Fast-moving items require a more robust buffer than slow-moving goods because the cost of a stockout is higher.
Some businesses ignore lead time variability. If a supplier typically takes 7 days but occasionally takes 14, the reorder level must be adjusted upward to reflect the worst-case scenario.
Impact on cash flow and growth
Precise reorder levels improve the cash conversion cycle. By reducing the amount of money sitting in the warehouse as dead stock, a business frees up liquidity.
This liquidity can be redeployed into marketing or expanding the product range, accelerating growth without the need for expensive short-term loans.
It also builds resilience. A business that understands its lead times and stock buffers is less likely to be paralyzed by a sudden supplier failure or a temporary logistics breakdown.
Action for SME owners: Identify your top five fastest-moving products this week. Calculate the average daily usage for each and set a formal reorder level to prevent unnecessary cash lock-up.
