Inventory Reorder Point and Safety Stock Calculator

Running out of a best-selling product loses sales and customers. Holding too much of it ties up cash and shelf space. The reorder point is the stock level at which you place the next order so that, on average, the delivery arrives just as the shelf empties, with a cushion for the weeks when sales or deliveries do not go to plan. This page works it out from daily sales, lead time and the level of protection you want.

Two parts

The first part is the demand you expect while waiting for the order: average daily sales times the lead time in days. The second is safety stock, a buffer for variation. Add them and you have the reorder point. When stock, counting what is already on order, falls to that level, it is time to buy. The page can check this for you if you enter the stock you have now.

The statistical method

Sales vary from day to day, and delivery times vary from order to order. The statistical method combines both. Enter the spread of daily sales and the spread of the lead time, both as standard deviations, and choose a service level, the chance of not running out during the lead time. The service level becomes a z-score: 1.2816 for 90%, 1.6449 for 95%, 1.96 for 97.5%, 2.3263 for 99% and 3.0902 for 99.9%. Safety stock is z × √(lead time × sales variance + sales² × lead-time variance).

The simple method

If you do not have the spreads, use the highest daily sales you have seen and the longest lead time. The buffer is the highest sales times the longest lead time, minus the average sales times the average lead time. It is generous, because it assumes the worst on both at once, and it is easy to explain to a team. The highest figures must be at least the averages, or the page says so.

A worked example

The default is a product that sells 40 units a day on average, with a spread of 12 units, a lead time of 7 days with a spread of 1 day, and a 95% service level. Demand during the lead time is 280 units. Safety stock is 1.6449 × √(7 × 12² + 40² × 1²) = 1.6449 × 51.07 = 84.0, rounded up to 85 units, so the reorder point is 365 units, which covers 9.1 days of sales. At 99% the multiplier is 2.3263, safety stock 119 and the reorder point 399. With 390 units in stock, the page says to order now, because 390 is at or below 399. The simple method with a peak of 70 units a day and a longest lead time of 12 days gives a buffer of 70 × 12 − 40 × 7 = 560 and a reorder point of 840, more than twice the statistical one.

Choosing the service level

Each step up costs more stock. Going from 95% to 99% added 34 units here, and 99.9% would add more again. Choose a higher level where a stock-out is costly, such as a part that stops a production line, and a lower one for cheap, slow-moving items. The best level is where the cost of the extra stock equals the expected cost of running out.

Edge cases

Average daily sales and lead time must be above zero. The spreads can be zero, which gives no safety stock. Stock on hand is optional and should include orders already on the way. A spread larger than the average is allowed, since sales can be very uneven, but it will raise the buffer sharply.

Limits

The statistical method assumes that sales and lead times are roughly normal and independent from day to day. Seasonality, promotions and trends break that assumption, so recompute with figures from the relevant season. The method also ignores the order quantity and review period, which matter if you only check stock weekly.

Related tools

• Economic Order Quantity (EOQ) Calculator answers the other question: how much to order each time.
• Inventory Turnover and Sell-Through Rate Calculator shows how fast the stock you hold actually sells.
• Break-Even Point Calculator tests whether a slow product earns its place on the shelf.
• Wholesale vs Retail Tiered Pricing Calculator shows what a larger order size does to your price.