Safety stock and reorder point
Every warehouse faces the same two questions: when should we order, and how much? Order too early and money is tied up. Order too late and customers wait. The reorder point and safety stock give a practical answer.
The reorder point
The reorder point is the stock level at which you place a new order. It covers the demand during the time it takes the supplier to deliver, plus a buffer.
Reorder point = average daily demand × lead time in days + safety stock.
An example
Suppose you sell about 20 units a day and your supplier needs 7 days to deliver. The demand during the lead time is 140 units. If you also keep 30 units as a buffer, your reorder point is 170 units. When stock falls to 170, you place an order.
Safety stock: the buffer
Safety stock protects you from surprises: demand that is higher than expected, or a delivery that arrives late. The more variable the demand and the supplier's delivery time, the larger the buffer you need.
A simple approach is to take the difference between your maximum and average daily demand, and multiply it by the lead time. Or look at your worst delay in recent months and cover it.
Order quantity
How much to order depends on cost and storage. Ordering large quantities lowers the unit price and the transport cost, but ties up money and space. Ordering small quantities keeps stock lean but increases order costs. Balance these for your most important items first.
Keep data reliable
These calculations are only as good as your numbers. Wrong stock records lead to wrong triggers. Regular counts and clean data are the foundation of any reorder system.
Review regularly
- Revisit demand figures every few months.
- Update lead times when suppliers change.
- Raise the buffer before seasonal peaks.
- Lower it for items that sell slowly.
Watch out for these traps
- Using an average that hides strong seasonality.
- Forgetting that lead times change at holidays or in bad weather.
- Ignoring minimum order quantities of suppliers.
- Counting stock that is damaged or reserved as available.
Use a two-bin idea for simple items
For low-value items, a simple method is to keep two containers. When the first is empty, place an order and start using the second. The second container is the reorder point and the safety stock in one, and needs almost no calculation.
Start with your most important products, set simple rules and refine them as you learn.