Reorder Point Calculator

Setting it out

Reorder point is the stock level at which a new order has to be placed: (average daily demand × lead time in days) + safety stock. Everything before the plus sign is what you will sell while waiting; everything after is the cushion against being wrong about it.

The two halves answer different questions. Lead time demand is a forecast, and safety stock is the admission that the forecast has error in it. A reorder point without safety stock is a bet that demand and lead time will both behave exactly as expected, and they rarely both do.

Worked through

A product selling 40 units a week with a three-week supplier lead time. Lead time demand is 40 × 3 = 120 units.

Weekly demand varies with a standard deviation of about 12 units. Over three weeks that variability is 12 × √3 = 20.8 units. At a 95% service level the safety factor is 1.65, so safety stock is 34 units.

The reorder point is 120 + 34 = 154 units. When stock falls to 154, the order goes in, and on average 34 units remain when it arrives.

Where it goes wrong

Lead time variability usually matters more than demand variability, and it is the half most often ignored. A supplier averaging three weeks who occasionally takes five will stock you out even with demand behaving perfectly, and no amount of demand-side safety stock fixes a lead time that doubles.

The calculation also assumes stock on hand is what the system says. Where inventory accuracy runs at 92%, the reorder point fires against a number that is wrong 8% of the time, and the safety stock quietly absorbs the counting error instead of the demand error it was sized for.

Making it useful

Set the reorder point in the system rather than watching for it. A number nobody has to notice is the only kind that works during a busy week, which is exactly when stock moves fastest and nobody is checking levels.

Then recalculate it when demand shifts rather than annually. A product whose weekly sales have gone from 40 to 65 has a reorder point of 195 + safety, and running the old 154 means ordering three weeks of stock when four weeks will pass before it lands.

Handling lead time variability properly

Where the supplier's lead time varies, the safety stock calculation has to include it. The combined formula is z × √(lead time × demand variance + demand² × lead time variance), which sounds worse than it is, the second term is usually the larger one.

With the same product, a lead time averaging three weeks but varying by a week either side adds 40 × 1 = 40 units of variability from that source alone, against 20.8 from demand. Combined, the safety stock rises from 34 units to about 74.

That doubling is the honest cost of an unreliable supplier, and it is worth quantifying because it makes the conversation concrete. Forty extra units at $18 is $720 of permanently tied-up capital caused by lead time inconsistency, which is a number a supplier can be shown, and one that frequently justifies paying slightly more for a supplier who ships on schedule.