Inventory Math

How to Calculate Safety Stock, Inventory Turnover, and Landed Cost

Work through the core supply chain formulas with real inputs and numbers: safety stock, reorder point, inventory turnover, and landed cost per unit.

Four calculations carry most inventory decisions: safety stock, reorder point, inventory turnover, and landed cost. Each needs specific inputs you can pull straight from your ERP. Safety stock covers demand and lead time variability. Reorder point tells you the on-hand quantity that triggers a purchase order. Turnover measures how fast stock cycles. Landed cost converts a supplier price into your true cost per unit. Get the units right and these run on a spreadsheet in minutes. This guide walks each formula with worked numbers so you can reproduce them against your own data using the Safety Stock Calculator and Inventory Turnover tools.

Safety stock with variable demand and variable lead time uses SS = Z times the square root of (LT times sigma_d squared plus D squared times sigma_LT squared). Z is the service factor: 1.65 for 95 percent, 2.33 for 99 percent. Say average daily demand D is 400 units, demand standard deviation sigma_d is 60 units per day, average lead time LT is 12 days, and lead time standard deviation sigma_LT is 2 days. The term under the root is 12 times 3600 plus 160000 times 4, equal to 43200 plus 640000, or 683200. Its root is 826.6, times 1.65 gives 1364 units of safety stock. Feed the Demand Variability output straight into this.

Reorder point is demand during lead time plus safety stock: ROP = (D times LT) plus SS. Using the same numbers, D times LT is 400 times 12, or 4800 units consumed while you wait on replenishment. Add the 1364 units of safety stock and the reorder point is 6164 units. When on-hand plus on-order falls to 6164, you cut a PO. If your lead time tightens to 10 days after a supplier switch, recompute: 400 times 10 is 4000, and with SS near 1250 the ROP drops to roughly 5250, freeing about 900 units of working capital tied up in stock.

Inventory turnover is annual cost of goods sold divided by average inventory value, both at cost, not retail. If COGS is 9.6 million dollars and average inventory across 12 month-end snapshots is 1.2 million dollars, turnover is 8.0 turns per year. Days of inventory on hand is 365 divided by turns, so 365 over 8 equals 45.6 days of supply. Use average inventory, not a single month, or seasonality skews the ratio. The Inventory Turnover Calculator does this per SKU family so a slow A-item at 3 turns is not hidden by fast C-items at 20.

Landed cost per unit rolls every acquisition expense into one number: unit price plus freight per unit plus duty plus insurance plus handling and broker fees. Take a 4.20 dollar ex-works price, ocean freight of 0.35 per unit, a 6.5 percent duty on the 4.20 base equal to 0.273, insurance of 0.04, and broker and handling of 0.18. Landed cost is 4.20 plus 0.35 plus 0.273 plus 0.04 plus 0.18, or 5.043 dollars per unit, a 20 percent uplift over the sticker price. The Landed Cost Calculator and Tariff Impact Calculator handle multi-line allocations by weight or value.

Allocate shared freight and duty correctly or per-unit cost lies to you. A 40 foot container carrying three SKUs should split ocean freight by cubic volume, not unit count, because a bulky low-value part consumes more space than its value warrants. If total container freight is 4200 dollars and SKU A fills 55 percent of the cubic capacity, A absorbs 2310 dollars. Divide by A's 6000 units to get 0.385 per unit of freight. Value-based allocation is fine for duty and insurance, but volume-based allocation for freight prevents systematically under-costing dense, cheap items and over-costing light, expensive ones.

Two inputs drive most errors, so verify them first. Lead time must be measured from PO release to dock receipt, including customs clearance, not just the supplier's quoted production time. Pull 12 months of actual receipts and compute the mean and standard deviation from real dates. Demand variability should exclude one-time bulk orders that are not part of normal pull, or sigma_d inflates and safety stock balloons. A single 5000 unit promotional order in a 400 per day baseline can double your computed standard deviation and add hundreds of units of unnecessary safety stock across the year.

Chain the outputs to size an inventory position end to end. Start with Demand Variability for D and sigma_d, add measured lead time statistics, run the Safety Stock Calculator for SS, add demand during lead time for the reorder point, then confirm the resulting average inventory hits your turnover target in the Inventory Turnover tool. If safety stock of 1364 units plus half the 4000 unit order cycle gives average inventory of about 3364 units, at a 5.04 dollar landed cost that is roughly 16950 dollars per SKU, and dividing annual COGS by it tells you whether you are at 8 turns or drifting toward a slow 4.

Published 2026-07-01.