A reorder point is the stock level at which you place a new order. When a product falls to that level, you buy more — not because a date arrived or a report was reviewed, but because the quantity remaining is the quantity you calculated would carry you through until the next delivery lands.
It is the most useful number in inventory management and the one most often set by guesswork. Get it right and stock arrives shortly before you run out. Get it wrong in one direction and you run out; wrong in the other and you carry more stock than you need, permanently.
The reorder point, defined
The reorder point answers one question: how low can this product get before I have to buy more?
The answer has two components. First, how much you will sell whilst waiting for the delivery — if the supplier takes two weeks and you sell 20 a day, you need 280 units just to trade through the wait. Second, a buffer for the days when demand runs hot or the supplier runs late.
Add those together and you have the level at which ordering becomes necessary. Above it, you can wait. At it or below it, you are relying on nothing going wrong.
Note what a reorder point is not. It is not how much to order — that is a separate calculation, covered by economic order quantity. It is not a minimum stock level you intend to hold. And it is not a fixed figure: it changes as demand changes and as suppliers get faster or slower.
Why the reorder point matters
It is the mechanism that prevents most stockouts. Nearly every availability failure traces back to one of three things: the reorder point was too low, it was calculated from a lead time the supplier does not actually achieve, or nobody acted when it fired. All three are fixable, and the first two are arithmetic.
It is also where cash gets trapped. A reorder point set generously “to be safe” means every product sits on a higher average stock level all year. Across a range, that is a substantial amount of capital doing nothing, and it is invisible because no single line looks unreasonable.
It removes judgement from a routine decision. Buying decisions made by whoever noticed a shelf looking empty are inconsistent and slow. A calculated trigger is neither.
It makes automation possible. Reorder points are what let a system raise purchase suggestions without a person reviewing every line, which is the only way a range of any size is manageable.
The balance between running out and tying up cash is the whole of the tension, and the reorder point is where you resolve it deliberately rather than by accident.
The reorder point formula
Reorder point = (average daily demand × lead time in days) + safety stock
Three inputs, and each one has a trap in it.
Average daily demand. Units sold per day, averaged over a period long enough to be representative. Two cautions. Use a period that reflects current trading rather than last year — a product growing 40% year on year needs a recent average, not an annual one. And exclude any period when the product was out of stock, because sales during a stockout record availability, not demand, and including them teaches the calculation that demand is lower than it is on the very product that already failed you.
Lead time in days. The time from raising the order to the stock being available to sell. This is where most reorder points go wrong, for two reasons. First, people use the supplier’s quoted lead time rather than their measured one — pull your last twenty receipt dates and calculate the real figure, which is frequently several days longer. Second, people measure to delivery rather than to availability. If goods take two days to be booked in and put away, those two days belong in the lead time, because stock in the receiving bay cannot be picked.
Safety stock. The buffer covering variability in both demand and lead time. Sized properly, it comes from the spread of your demand and the spread of your supplier’s delivery times at a service level you have chosen. There is a full treatment in safety stock.
A worked example, with safety stock
A business sells a kitchen product steadily.
Step one — establish average daily demand. Over the last 90 trading days it sold 1,620 units. That is 1,620 ÷ 90 = 18 units a day.
Step two — measure the lead time. The supplier quotes 10 days. The last twenty purchase orders took between 11 and 17 days from order to goods being put away, averaging 14 days. Use 14, not 10.
Step three — calculate lead time demand. 18 × 14 = 252 units. This is what you will sell whilst waiting, if everything runs to average.
Step four — set safety stock. Demand varies by roughly 4 units a day either side of the average, and the lead time varies by about 3 days. A buffer sized for a 95% service level on this variability comes out at 95 units. (The safety stock guide covers the calculation; the point here is that it is derived from measured variability rather than chosen.)
Step five — add them together.
Reorder point = 252 + 95 = 347 units
What that means in practice. When stock falls to 347, raise the order. On an average fortnight the delivery arrives with about 95 units left — the buffer untouched. On a bad fortnight, where demand runs high and the supplier takes 17 days, that buffer is what stands between you and a stockout.
A worked example, without safety stock
Some businesses set reorder points without a buffer, either deliberately — for cheap, easily substituted items where running out is tolerable — or because nobody has calculated one.
Using the same figures:
Reorder point = 18 × 14 = 252 units
What that means. You order at 252 and the stock arrives exactly as the last unit sells — but only if demand runs at precisely 18 a day and the supplier takes precisely 14 days. Neither is likely.
Because the lead time averages 14 days, roughly half your deliveries will take longer than that. Because demand averages 18, roughly half your fortnights will be busier. A reorder point with no safety stock produces a stockout on something close to half of all cycles, which is why the buffer exists.
There is a narrow case for it: slow-moving, low-value items with easy substitutes, where the cost of holding buffer across hundreds of lines exceeds the cost of occasionally running out. That is a deliberate commercial choice. Doing it by omission is not.
A reorder point calculator
Work through this for any product. The arithmetic takes two minutes; gathering the inputs honestly takes longer and matters more.
| Step | What to find | Your figure |
|---|---|---|
| 1 | Units sold over a recent representative period | |
| 2 | Number of trading days in that period | |
| 3 | Average daily demand = step 1 ÷ step 2 | |
| 4 | Order-to-available time on your last 20 receipts, averaged | |
| 5 | Lead time demand = step 3 × step 4 | |
| 6 | Safety stock for this line | |
| 7 | Reorder point = step 5 + step 6 |
A worked row, for reference: 1,620 units ÷ 90 days = 18 a day. 18 × 14 days = 252. Plus 95 safety stock = a reorder point of 347.
Three checks before you use the answer.
- Did you exclude stockout periods from step 1? If not, your demand figure is too low.
- Did you measure to available to sell in step 4, not to delivery? Receiving and putaway time counts.
- Is step 3 based on recent trading rather than a year-old average? Growing and declining lines both need current data.
If you do not yet have a safety stock figure, a rough interim buffer is the extra demand you would see if the supplier hit their worst recent lead time — in the example, 3 extra days at 18 a day, or 54 units. It is cruder than a proper calculation and considerably better than zero.
Reorder point vs safety stock vs EOQ
Three related numbers that answer different questions, and they get confused constantly.
| Question it answers | What it depends on | |
|---|---|---|
| Reorder point | When do I order? | Demand during lead time, plus the buffer |
| Safety stock | How much buffer do I hold against things going wrong? | Variability in demand and in lead time, and your chosen service level |
| Economic order quantity | How much do I order each time? | Annual demand, cost per order, and holding cost per unit |
They fit together in sequence. Safety stock is calculated first, because the reorder point contains it. The reorder point then tells you when to act. EOQ tells you how much to buy when you do.
A common error is treating the reorder point as a minimum stock level to be maintained. It is not a floor you hold — it is a trigger you pass through. Stock is meant to fall below it whilst the order is in transit, and the safety stock component is what should still be there when the delivery arrives.
Common mistakes when setting reorder points
Using quoted lead times. The single most common failure. Suppliers quote what they aim for; measure what they achieve.
Ignoring receiving and putaway time. Stock delivered on Friday and booked in on Tuesday was not available for four days, and those days belong in the lead time.
Including stockout periods in the demand average. This understates demand on exactly the products that already ran out, which makes the next stockout more likely.
Setting them once and never reviewing. Demand grows, suppliers change, seasons shift. A reorder point set two years ago is describing a business that no longer exists. Review the significant lines quarterly and the rest annually.
Applying one service level across the whole range. Your top products and anything customers come to you specifically for warrant a high buffer. A slow-moving item with easy substitutes does not, and holding one is money doing nothing.
Forgetting stock already on order. The trigger should compare the reorder point against available stock plus stock already in transit, not against what is physically on the shelf. Otherwise you order twice.
Ignoring minimum order quantities. If the supplier’s minimum is 500 and your reorder point is 347, ordering at 347 means holding far more than intended. The two numbers have to be reconciled deliberately.
Nobody acting when it fires. A calculated trigger that produces an alert nobody answers is worse than no system, because it creates the belief that the problem is handled.
Ignoring seasonality. A single average across a year is wrong in both directions for a seasonal product. Either use seasonal averages or adjust the reorder point ahead of known peaks.
Where to go deeper
- What is safety stock — sizing the buffer inside the formula.
- What is economic order quantity — how much to order once the trigger fires.
- What is a stockout — what happens when the point is set too low.
- What is demand forecasting — improving the demand input.
- What is inventory control — the record accuracy the trigger depends on.
- Inventory management techniques — where reorder points sit among the alternatives.
The one-line takeaway
A reorder point is the stock level that triggers a purchase: demand during the supplier’s lead time, plus a safety buffer. Calculate the lead time from what suppliers actually achieve rather than what they quote, exclude stockout periods from your demand average, and review it as trading changes — those three habits fix more availability problems than anything else available.
Frequently asked questions
What is a reorder point? The stock level at which you place a new order for a product. It is the amount you expect to sell during the supplier’s lead time, plus a safety buffer for the times when demand runs high or delivery runs late.
How do I calculate a reorder point? Multiply average daily demand by the lead time in days, then add safety stock. Use demand from a recent representative period with stockout periods excluded, and use the lead time your supplier actually achieves — measured from your last twenty receipts — rather than the one they quote.
What is the reorder point formula without safety stock? Average daily demand multiplied by lead time in days. It produces a trigger that leaves you with nothing in reserve, so roughly half of all cycles will run short. It is defensible only on cheap, easily substituted lines where occasional stockouts are acceptable.
What is the difference between a reorder point and safety stock? Safety stock is the buffer held against variability. The reorder point is the trigger level, and it contains the safety stock within it. Safety stock answers “how much cushion?”; the reorder point answers “when do I order?”.
How often should I review reorder points? Quarterly for your significant lines, annually for the rest, and immediately after any change in supplier, lead time or demand pattern. A reorder point set two years ago describes a business that has since moved on.
Should the reorder point include stock already on order? The comparison should be against available stock plus stock already in transit. Comparing only against what is physically on the shelf causes duplicate orders, particularly on lines with long lead times.
What if my supplier has a minimum order quantity above my reorder point? Reconcile the two deliberately. Either accept holding more than the calculation suggests, negotiate the minimum down, or consolidate orders across products from the same supplier so the minimum is reached without overbuying any one line.
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