How to calculate when to reorder stock

Reorder when the stock left will just cover the lead time, plus a buffer for the times it does not.

Too little stock means lost sales; too much ties up cash and risks obsolescence. The reorder point is where those pressures balance.

Step-by-step

1. Enter average demand per day or week.
2. Enter supplier lead time.
3. Enter the variability you want to protect against.
4. Read the reorder point and quantity.

The calculation

Reorder point equals demand during lead time, plus safety stock. Sell 10 a day with a 14-day lead time and you need 140 in hand when you order, before any buffer.

Safety stock covers the two things that vary: demand running above average, and the supplier being late. Both happen, and they have an unpleasant habit of happening together.

Lead time variability is the bigger risk

People buffer against demand and assume the supplier's stated lead time. In practice late deliveries cause more stockouts than demand spikes, particularly with overseas suppliers where a delay is measured in weeks.

Use the lead time you actually experience, not the one on the purchase order.

Order quantity

Ordering more per order reduces order costs and often earns a price break, while increasing holding cost and the risk of being left with stock nobody wants. Small frequent orders do the reverse.

Where a supplier offers a volume discount, check it against the cost of holding the extra stock for the months it will sit there — the discount frequently loses.

Frequently asked questions

How much safety stock do I need?

Enough to cover the variation in demand and lead time you actually experience. Late deliveries usually cause more stockouts than demand spikes, so buffer against both.

Should I take the volume discount?

Only if it exceeds the cost of holding the extra stock for however long it will sit. Discounts on slow-moving lines frequently cost more than they save.

Should every product have a reorder point?

Concentrate on the lines that account for most of your value and use simpler rules elsewhere. Managing everything with equal rigour wastes effort on items that do not repay it.