Run out of a best-seller and you lose sales, and sometimes the customer. Overstock and you tie up cash and shelf space. The reorder point tells you when to place the next order so new stock arrives just before you run out, with safety stock as a cushion for surprises.
The reorder point formula
Reorder point (ROP) = Lead-time demand + Safety stock
Lead-time demand = Average daily demand × Lead time (days)
- Average daily demand: units sold per day on average, from your recent sales.
- Lead time: days from placing an order to having stock ready to sell, including supplier processing, shipping and your own receiving time.
- Safety stock: extra units held for days when demand is higher or delivery is slower than average.
When stock on hand (plus anything already on order) drops to the reorder point, you reorder.
Worked example: the setup
A shop sells a popular mug:
- Average demand: 20 units/day
- Average lead time: 7 days
- Lead-time demand = 20 × 7 = 140 units
Without safety stock, you'd reorder at 140 units. That works only if every day is perfectly average, so you need safety stock.
Method 1: max minus average (simple)
Safety stock = (Max daily demand × Max lead time) − (Average daily demand × Average lead time)
Suppose your busiest realistic day is 30 units and the slowest delivery you've had is 10 days:
- Safety stock = (30 × 10) − (20 × 7) = 300 − 140 = 160 units
- ROP = 140 + 160 = 300 units
This method is easy to explain and needs no statistics. But it assumes the worst demand and the worst lead time happen together, which is rare, so it often produces a lot of safety stock. It suits items where a stockout is very costly and holding cost is low.
Method 2: service level (statistical)
If daily demand varies around an average, you can size safety stock for a chosen service level, the probability of not running out during a replenishment cycle:
Safety stock = Z × σ(daily demand) × √(Lead time)
- σ (sigma): the standard deviation of daily demand, which you can calculate from daily sales data (spreadsheets have a STDEV function).
- Z: the standard normal value for your service level.
| Service level | Z |
|---|---|
| 90% | 1.28 |
| 95% | 1.645 |
| 97.5% | 1.96 |
| 99% | 2.33 |
With σ = 6 units/day, lead time 7 days and a 95% service level:
- Safety stock = 1.645 × 6 × √7 ≈ 1.645 × 6 × 2.646 ≈ 26.1 units
- ROP = 140 + 26.1 ≈ 166 units
Much leaner than method 1's 300 units. The trade-off is that it only covers demand variability. If your lead time also varies a lot, the safety stock should be larger (there are extended formulas that include lead-time variability).
Try both methods in the free reorder point & safety stock calculator.
Choosing a service level
Higher service levels need disproportionately more stock: going from 95% to 99% raises Z from 1.645 to 2.33, about 42% more safety stock. A common approach:
- Best-sellers and items customers can't substitute: higher service level.
- Slow movers and items with easy substitutes: lower service level.
- Perishables: balance stockout cost against spoilage.
How much to order
The reorder point tells you when. The order quantity is a separate decision. It depends on supplier minimums, volume discounts, storage space and cash. A simple rule is to order enough to cover demand until the next planned order date, plus safety stock, minus stock on hand and on order.
A quick worked reorder decision
On Monday morning the mug has 180 units on hand and none on order. Using the service-level reorder point of 166, you don't order yet. By Monday evening, after a 20-unit day, stock is 160, below 166, so you place the order. With a 7-day lead time and average sales of 140 units in that time, about 20 units remain when the delivery lands. On busier-than-average days, the safety stock built into the reorder point is what keeps you from selling out.
Practical tips
- Use recent data, for example the last 8–12 weeks, and recalculate when seasons change.
- Count stock on order. If an order is already on its way, include it, or you'll double-order.
- Measure real lead time from order to sellable stock, not the supplier's promise.
- Review the reorder point when a product starts selling faster. A static number goes out of date quickly.
Inventory is cash
Every unit of safety stock is money sitting on a shelf. Knowing your margins and fixed costs helps you decide how much stock you can afford. See break-even analysis.
Frequently asked questions
How often should I recalculate the reorder point? Monthly for fast movers and whenever demand or supplier lead times change noticeably, such as before a holiday season or after switching suppliers.
What if I sell an item only occasionally? Average daily demand and standard deviation are unreliable for very slow movers. A simple minimum stock level or ordering on demand often works better.
Key takeaways
- Reorder point = Average daily demand × Lead time + Safety stock.
- The max-minus-average method is simple but usually generous.
- The service-level method sizes safety stock from demand variability.
- Use real, recent lead times and include stock already on order.
Automate the alerts
Calculating reorder points for every SKU and checking stock against them every day is exactly the kind of repetitive work a spreadsheet handles well. The Inventory & Sales Tracker template for Excel and Google Sheets tracks stock levels and sales and flags items that have hit their reorder point.