Reorder point: formula, safety stock and worked examples

What is the reorder point formula?

The reorder point is the stock level that triggers a new order. It covers what you will sell while you wait for the delivery, plus a buffer for surprises.

Reorder point = average daily usage × lead time (days) + safety stock

The three parts:

• Average daily usage: how many units leave the shelf on a normal day.
• Lead time: the days from placing the order to the goods being on your shelf and ready to sell.
• Safety stock: spare units for when sales run high or the delivery is late.

You can try your own figures in the reorder point calculator.

How do you work out a reorder point, step by step?

Take each part in turn and use real figures from your records, not guesses.

Worked example. A wholesaler sells a 1 kg bag of rice.

1. Daily usage. Over the last 8 weeks (56 days) it sold 1,120 bags. 1,120 ÷ 56 = 20 a day.
2. Lead time. The supplier delivers 5 days after the order, and it takes another day to check and shelve. That is 6 days; round up to 7 to allow for weekends.
3. Safety stock. You decide to keep 3 days' extra cover: 3 × 20 = 60 bags.
4. Reorder point. 20 × 7 + 60 = 200 bags.

When the stock falls to 200 bags, you order. If everything goes normally, about 140 bags sell during the 7-day wait, and the delivery arrives with about 60 still on the shelf.

How do you measure daily usage properly?

Use a period long enough to smooth out odd days but short enough to reflect current demand. Four to eight weeks works for most lines; use a full year's pattern for seasonal ones.

• Count only days you are open. If you trade 6 days a week, divide by trading days and measure lead time in trading days too.
• Take out one-off bulk orders that will not repeat, or they will inflate the average.
• Watch for days the item was out of stock. Sales of zero because the shelf was empty are not low demand; leave those days out.
• For anything with a clear trend, give more weight to recent weeks.

How do you measure lead time?

Measure it from the moment you place the order to the moment the goods can be sold. Suppliers quote dispatch times; what matters to you is shelf time.

Include:

• The supplier's processing and dispatch time.
• Transport time.
• Time to receive, check and put away.
• Any wait for the next order day, if you only order on set days.

Write down actual lead times for your last five or ten deliveries from each supplier. The average gives you the lead time; the worst one tells you how much safety stock you need.

How much safety stock should you keep?

Enough to cover a realistic bad case for that line, and no more. Too little and you run out; too much and you tie up cash. There are three common ways to set it, from simplest to most precise.

1. Days of cover (simplest). Keep a fixed number of extra days of usage.

Safety stock = average daily usage × safety days

For the rice: 20 × 3 = 60.

2. Maximum minus average. Uses the worst sales day and the worst lead time you have seen recently.

Safety stock = (maximum daily usage × maximum lead time) − (average daily usage × average lead time)

If the rice sold up to 28 bags on a busy day and the slowest delivery took 10 days: (28 × 10) − (20 × 7) = 280 − 140 = 140 bags. This method is cautious, because it assumes the worst sales and the worst delivery happen together.

3. Service level (statistical). If you know how much daily sales vary, you can aim for a chosen chance of not running out during a lead time.

Safety stock = Z × standard deviation of daily usage × √lead time

Z is a factor for the service level: about 1.28 for 90%, 1.65 for 95% and 2.33 for 99%. If daily sales of the rice have a standard deviation of 6 bags and lead time is 9 days, then safety stock at 95% = 1.65 × 6 × √9 = 1.65 × 6 × 3 ≈ 30 bags.

Higher service levels cost more stock for less benefit each time. Moving from 95% to 99% raises the Z factor from 1.65 to 2.33, about 40% more safety stock, to avoid a few extra stock-outs a year. Save the high levels for the lines customers cannot do without.

What do reorder points look like across a range?

Different lines need very different reorder points. Here is a set of examples with 3 days' safety cover, except the medicine line, which gets 7 because running out is not acceptable:

Notice that the phone charger sells far less than the rice, yet its reorder point is not much lower. Long lead times push reorder points up, which is one reason a closer supplier can be worth a slightly higher price.

How much should you order when you hit the reorder point?

The reorder point tells you when to order. How much depends on how many days you want each order to cover, then on pack sizes and the supplier's minimums.

Order quantity = average daily usage × days of cover, rounded up to whole cases and at least the minimum order

Worked example. You want each rice order to last two weeks. 20 × 14 = 280 bags. The rice comes in bales of 24, so 280 ÷ 24 = 11.7, rounded up to 12 bales, 288 bags.

Choose the days of cover by balancing two costs: ordering often costs time and delivery charges; ordering rarely ties up cash and space. Fast, cheap-to-store lines can be ordered often. Lines with a large delivery charge or a price break at a higher quantity may be worth ordering less often in bigger batches, as long as they will sell well before any expiry date.

What if you order on fixed days instead?

Many businesses order from each supplier on a set day each week rather than whenever a line hits its reorder point. Then use an order-up-to level instead.

Order-up-to level = daily usage × (lead time + days between orders) + safety stock

Order quantity = order-up-to level − stock on hand − stock already on order

Worked example. You order cooking oil every 7 days, lead time is 10 days, usage is 6 a day and safety stock is 18.

• Order-up-to level = 6 × (10 + 7) + 18 = 120
• On order day you have 52 on the shelf and 30 already on the way.
• Order quantity = 120 − 52 − 30 = 38, rounded to whole cases.

Always subtract stock already on order. Forgetting it is the most common cause of double ordering.

When does a reorder point stop working?

A reorder point is only as good as the numbers behind it. Recalculate when:

• Demand changes: a new customer, a lost customer, a price change or a competitor closing nearby.
• Seasons turn: set seasonal reorder points a lead time before the season starts, not when it does.
• You run a promotion: add the expected extra sales on top for the promotion period.
• The supplier changes: new lead times, new minimums or repeated late deliveries.
• Stock records are wrong: if the system figure is not what is on the shelf, every reorder is wrong. Fix this first with regular counts; see how to do a stocktake.

What is a quick reorder point checklist?

• Daily usage from 4 to 8 weeks of real sales, out-of-stock days removed.
• Lead time measured from order to shelf, using your own recent deliveries.
• Safety stock set by how critical the line is and how reliable the supplier is.
• Order quantity rounded to pack sizes and supplier minimums.
• Stock already on order subtracted before ordering.
• Fast lines reviewed monthly, all lines before each season.

For the wider routine around reordering, see the stock control guide. To see how much cash your stock levels tie up, read stock valuation.