Understanding the Reorder Point Formula
The deterministic reorder point equation
The formula is: Reorder Point = (Average Daily Demand × Lead Time in Days) + Safety Stock. The first component accounts for the inventory you expect to sell while waiting for supplier delivery. The second component provides a safety cushion against delivery delays or unexpected customer demand spikes.
Determining appropriate safety stock
Safety stock is not zero-risk insurance. Holding excess safety stock increases holding costs and ties up working capital. For reliable local suppliers with next-day delivery, safety buffers can be lean. For overseas or volatile supply chains, larger buffers are essential to maintain shelf availability.
Practical retail ordering considerations
In physical retail, reorder points work alongside supplier constraints. If your calculated reorder point is 70 units, but the supplier only ships in cases of 24 units with a 100-unit minimum order quantity (MOQ), your purchasing order must round up to the nearest valid case pack. Always check for open purchase orders in transit before triggering a reorder.