Reorder Point and Safety Stock: A Practical Example
Work through reorder point, safety stock, and inventory position, then separate the replenishment trigger from economic order quantity and stock coverage.
Separate when to order from how much to buy
A reorder point is a replenishment trigger. Economic order quantity, or EOQ, estimates an order size under a different set of assumptions. Days of supply shows how long available stock covers a daily demand estimate. These measures support different decisions: a business can reach its reorder trigger while still holding several days of stock, because the replacement order needs time to arrive.
Use inventory position, not just the warehouse balance
Inventory position equals on-hand stock plus on-order stock minus backorders. For example, 900 units on hand plus 600 on order minus 100 backordered gives an inventory position of 1,400 units. An on-hand-only rule would ignore the inbound order and could trigger unnecessary purchasing. Track expected receipt dates too: an overdue inbound order may not protect the period when stock is needed.
Worked example: expected lead-time demand
Suppose average demand is 80 units per day and average replenishment lead time is 14 days. Expected lead-time demand is 80 times 14, or 1,120 units. That covers the average case only. If consumption or supplier lead time varies, an order placed at 1,120 units may not arrive before stock runs out. The safety-stock model adds a buffer for that uncertainty.
Add a variability-based buffer
The calculator uses safety stock = z times the square root of (lead time times daily demand variance + average daily demand squared times lead-time variance). With daily demand standard deviation of 20 units, lead-time standard deviation of 2 days, and a 95% cycle service target, z is about 1.6449. The buffer rounds up to 291 units, giving a reorder point of 1,411 units. Use days consistently for demand and lead time.
Apply the trigger to the example
The inventory position of 1,400 is below the example reorder point of 1,411. Under this continuous-review rule, that calls for a replenishment review. It does not mean buying exactly 11 units, and it does not guarantee that every customer order will be filled. A cycle service target concerns avoiding a stockout during a replenishment cycle; it is not the same as the percentage of units supplied immediately.
Choose order quantity separately
For an EOQ example, use annual demand of 24,000 units, an ordering cost of $75 per order, and annual holding cost of $6 per unit. The square root of (2 times 24,000 times 75 divided by 6) is about 775 units per order. This classic model excludes safety stock and assumes steady demand and replenishment. Check case packs, minimum order quantities, storage, and supplier constraints before choosing a practical quantity.
Back-test before making the rule operational
The safety-stock approximation assumes independent demand and lead-time variation and a normal service-factor model. Intermittent demand, promotions, supplier disruptions, and correlated delays can make it unsuitable. Replay past demand and actual receipt dates, examine stockouts and excess stock, and review the rule when operating conditions change. A planning estimate is useful only when its assumptions remain visible alongside the result.