How do I calculate a reorder point?

Multiply average daily demand by lead time, then add safety stock. In the example, 120 units per day times a 7-day lead time equals 840 units of lead-time demand; adding 250 units of safety stock gives a reorder point of 1,090 units. When on-hand stock falls to 1,090, you place a replenishment order sized by your order quantity or EOQ. The safety-stock term is what protects you against demand and lead-time variability.

How much safety stock should I include in the reorder point?

Base it on variability, not a gut percentage. A common approach is safety stock = Z times the standard deviation of demand during lead time, where Z is 1.65 for 95% service or 2.33 for 99%. The example's 250 units on 120/day demand covers roughly two extra days. If lead time swings from 5 to 12 days, that flat buffer is likely too thin and should be recomputed from the spread.

Should reorder point use average or maximum lead time?

Use average lead time in the base formula and let safety stock absorb the variability. But if lead times range widely, say 5 to 12 days against a 7-day average, a 12-day spike consumes 1,440 units versus the 840 you planned, causing a stockout. Either add that variability into safety stock or, for critical parts, compute lead-time demand at the maximum lead time to be conservative.

How does reorder point differ from safety stock?

Safety stock is the buffer alone, 250 units in the example, held to cover variability. Reorder point is the full trigger level, 1,090 units, which includes both expected lead-time demand (840 units) and that safety stock. Safety stock sits inside the reorder point. You should not, on average, dip into safety stock; you consume the 840 lead-time portion while waiting, and the buffer only gets touched when demand or lead time runs high.

What units should demand and lead time be in for reorder point?

Keep them consistent: units per day for demand and days for lead time, so the product is in units. If you track weekly demand of 600 units, convert to a daily rate (600 / 5 working days = 120/day) before multiplying by lead time in days. Mixing a five-day work calendar for demand with a seven-day calendar for lead time is the most common error and understates the reorder point.

Why do I still get stockouts even though I set a reorder point?

Usually the safety stock is too small for actual variability, or lead time exceeded the 7 days assumed. Check whether real lead times hit 10 to 12 days against your planned 7; each extra day at 120 units burns 120 more units than the reorder point covered. Also verify average daily demand reflects recent usage, not stale history, and that receiving delays are counted inside lead time.

Supply Chain and Inventory

Reorder Point Formula

Reorder point is the inventory level that triggers a replenishment order. It ensures stock arrives before you run out by accounting for demand during lead time and your safety stock buffer. Use it when setting ERP min levels or kanban trigger points.

Formula

Reorder Point = (Average Daily Demand x Lead Time) + Safety Stock

Variables

Average Daily Demand: Average units consumed or sold per day
Lead Time: Replenishment lead time in days (from order placement to goods available)
Safety Stock: Buffer inventory to cover demand variability and lead time uncertainty

Understanding the Reorder Point Formula

Reorder point answers one operational question: at what on-hand quantity must I trigger replenishment so I do not run dry before goods arrive? It splits into two parts, expected consumption during lead time (average daily demand times lead time) plus a safety-stock buffer for the variability neither term captures. In the example, 120 units per day over a 7-day lead time consumes 840 units, and 250 units of safety stock lifts the trigger to 1,090. Below that level, you order.

Average daily demand comes from usage history, typically the trailing 8 to 13 weeks divided by working days, not calendar days if the line runs five days a week. Lead time must be the full order-to-shelf window, including supplier processing, transit, and receiving inspection, not just quoted ship time. Keep units consistent: units per day times days yields units. The classic gotcha is using a demand rate and a lead time measured on different calendars, which quietly understates the trigger.

The reorder point is a threshold, not a fixed order size; pair it with an order quantity or EOQ. If you hit 1,090 units and demand or lead time regularly overshoots, stockouts point to thin safety stock, not a wrong formula. Track service level: 250 units of buffer on 120/day covers about two extra days of demand. If lead time swings from 5 to 12 days, that buffer is inadequate; recompute safety stock from lead-time variability or use the maximum lead time.

Worked Example

Average daily demand is 120 units. Lead time is 7 days. Safety stock is 250 units.

Lead-time demand = 120 x 7 = 840 units
Reorder point = 840 + 250 = 1,090 units

Result: Place a new order when stock falls to 1,090 units

Common Mistake

Setting reorder point from average lead time without considering lead time variability. If lead times vary from 5 to 12 days, a reorder point based on 7-day average will cause stockouts when a 12-day lead time hits. Either add variability to safety stock or use a max lead time in the calculation.

Frequently Asked Questions

How do I calculate a reorder point?: Multiply average daily demand by lead time, then add safety stock. In the example, 120 units per day times a 7-day lead time equals 840 units of lead-time demand; adding 250 units of safety stock gives a reorder point of 1,090 units. When on-hand stock falls to 1,090, you place a replenishment order sized by your order quantity or EOQ. The safety-stock term is what protects you against demand and lead-time variability.
How much safety stock should I include in the reorder point?: Base it on variability, not a gut percentage. A common approach is safety stock = Z times the standard deviation of demand during lead time, where Z is 1.65 for 95% service or 2.33 for 99%. The example's 250 units on 120/day demand covers roughly two extra days. If lead time swings from 5 to 12 days, that flat buffer is likely too thin and should be recomputed from the spread.
Should reorder point use average or maximum lead time?: Use average lead time in the base formula and let safety stock absorb the variability. But if lead times range widely, say 5 to 12 days against a 7-day average, a 12-day spike consumes 1,440 units versus the 840 you planned, causing a stockout. Either add that variability into safety stock or, for critical parts, compute lead-time demand at the maximum lead time to be conservative.
How does reorder point differ from safety stock?: Safety stock is the buffer alone, 250 units in the example, held to cover variability. Reorder point is the full trigger level, 1,090 units, which includes both expected lead-time demand (840 units) and that safety stock. Safety stock sits inside the reorder point. You should not, on average, dip into safety stock; you consume the 840 lead-time portion while waiting, and the buffer only gets touched when demand or lead time runs high.
What units should demand and lead time be in for reorder point?: Keep them consistent: units per day for demand and days for lead time, so the product is in units. If you track weekly demand of 600 units, convert to a daily rate (600 / 5 working days = 120/day) before multiplying by lead time in days. Mixing a five-day work calendar for demand with a seven-day calendar for lead time is the most common error and understates the reorder point.
Why do I still get stockouts even though I set a reorder point?: Usually the safety stock is too small for actual variability, or lead time exceeded the 7 days assumed. Check whether real lead times hit 10 to 12 days against your planned 7; each extra day at 120 units burns 120 more units than the reorder point covered. Also verify average daily demand reflects recent usage, not stale history, and that receiving delays are counted inside lead time.