The inventory turnover ratio shows how many times a year your average stock sells: cost of goods sold divided by average inventory at cost. The reorder point is the stock level at which you order again: average daily sales × lead time + safety stock. Safety stock covers sales peaks and late deliveries, and the economic order quantity (EOQ) tells you how much to order.
These four numbers answer two questions most stores settle by gut feeling: when to order and how much. Get it wrong one way and products run out while buyers go elsewhere; the other way and cash sits on shelves for months. Below: each formula, one example from start to finish and where to get the data.
When people ask about this
The store has grown to a few hundred products, and supplier orders go out “when it looks low”. Some products sell out mid-season, others sit for six months. The owner searches “inventory turnover formula”, then “how much safety stock to keep” and “when to reorder from a supplier”.
The most common question is what a good turnover ratio is. There is no universal benchmark: electronics and apparel turn over at very different rates. Compare a product with its own past and with other products in its category.
How to calculate inventory turnover
Turnover is cost of goods sold for the period divided by average inventory at the same purchase cost. Days of inventory shows the same from the other side: how many days of sales your average stock covers.
Sample figures for the arithmetic, not market data. Over a year you sold goods worth €120,000 at cost; inventory was €22,000 at the start of the year and €18,000 at the end. Average inventory is €20,000, turnover is 120,000 ÷ 20,000 = 6 times a year, and days of inventory are 365 ÷ 6 ≈ 61 days.
Use purchase cost, not selling price: otherwise the markup inflates turnover. For products with uneven stock, average the monthly stock levels instead of using only two points.
How much safety stock to keep
Safety stock is the quantity that stays in the warehouse for days when sales run higher than usual or the supplier is late. The simplest formula uses the worst case from your own history:
In the example, the product sells 10 units a day on average and 15 on peak days; the supplier usually delivers in 5 days and at most in 7. Safety stock = 15 × 7 − 10 × 5 = 105 − 50 = 55 units.
If sales are steady and the lead time is reliable, you can keep less. If the supplier often misses dates, before raising safety stock check whether you can buy the same product from someone else.
When to order: the reorder point
The reorder point is the stock level at which you place a supplier order, so the new goods arrive before the old ones run out.
How much to order: the EOQ formula
The economic order quantity (EOQ, the Wilson formula) is the order size at which the yearly sum of ordering costs and holding costs is lowest.
In the example, annual demand is 10 × 365 = 3,650 units, placing and receiving one order costs €30, and holding one unit costs €2 a year. √(2 × 3,650 × 30 ÷ 2) = √109,500 ≈ 331 units, which is about 11 orders a year.
The formula knows nothing about volume discounts, the supplier’s minimum order or space in your warehouse. Use its result as a guide and round it to a pack size or minimum order quantity.
The whole example in one table
| Metric | Calculation | Result |
|---|---|---|
| Inventory turnover | 120,000 ÷ 20,000 | 6 times a year |
| Days of inventory | 365 ÷ 6 | 61 days |
| Safety stock | 15 × 7 − 10 × 5 | 55 units |
| Reorder point | 10 × 5 + 55 | 105 units |
| EOQ | √(2 × 3,650 × 30 ÷ 2) | 331 units |
Where these formulas mislead
- Seasonality. A yearly average understates the reorder point in season. Use the last 4–8 weeks or the same season last year.
- Stockout days. With no stock there were no sales, so average sales come out below real demand. Leave those days out.
- Several warehouses. Calculate turnover and the reorder point separately for each warehouse you ship from.
- Dead stock. A product with turnover near zero is not fixed by a formula; it needs to be sold off. How: dead stock.
Where to get the numbers without manual counting
Every formula needs three inputs: stock in each warehouse on a date, sales by day and the supplier’s lead time. If stock lives in a spreadsheet, the first one is already approximate. In Elbuz stock is calculated from confirmed documents (receipts, sales, transfers, stock counts), and the movement log shows every change with its date, which gives you both average inventory and daily sales. How it works: ecommerce inventory management.
Where it falls short: Elbuz does not calculate the reorder point or EOQ for you; you apply the formulas from this article to exported data in a spreadsheet.
Inventory in ElbuzStock from documents and a movement log, 14 days free
Frequently asked questions
How do you calculate the inventory turnover ratio?
Divide cost of goods sold for the year by average inventory at cost; average inventory is the beginning plus ending inventory divided by two. In the example it is 120,000 ÷ 20,000 = 6.
What is a good inventory turnover ratio?
It depends on the category: perishable or fast-ageing goods turn over faster. Compare with your previous period and with other products in your category rather than with someone else’s benchmark.
What is the difference between reorder point and safety stock?
Safety stock is the reserve you do not plan to touch, for peaks and delays. The reorder point is the level at which you order: sales during the lead time plus safety stock.
What is the EOQ formula?
EOQ = √(2 × annual demand × cost per order ÷ holding cost per unit per year). It gives the order size with the lowest total of ordering and holding costs.
How often should I recalculate the reorder point?
Whenever sales or the lead time change, and for seasonal products before each season.
