Reorder point and safety stock calculator

Calculating the reorder point: when should you reorder?

The reorder point is the stock level at which you place a new order. The idea is simple: between placing an order and receiving it, you keep selling or using stock. So you need to order while there is still just enough left to cover that lead time, plus a buffer for setbacks. As a formula: reorder point = average daily usage × lead time in days + safety stock.

How to use the calculator: 1. enter your average usage, per day or per week, and the lead time in days. Make sure you count usage and lead time in the same kind of days: if you sell five days a week and your supplier says ten working days, choose five days a week. 2. Choose how you want to calculate the safety stock. 3. Enter the costs for the order quantity. The result shows the formulas with your numbers, so you can check them or copy them into your own system.

Compare the reorder point with your inventory position, not only with what is physically on the shelf. The inventory position is the stock on hand plus what has been ordered but not yet delivered, minus what is already reserved for customers. With long lead times in particular, several orders are often open at the same time, and you end up ordering twice if you only look at the shelf.

Safety stock: simple or statistical

The simple method assumes a busy but realistic period: safety stock = maximum usage × longest lead time − average usage × average lead time. It is easy to explain and needs little data. The downside is that the result depends heavily on the maximum you choose, and you do not know how much certainty it buys you.

The statistical method uses the variability of your usage, expressed as the standard deviation per day, and a target service level. 95 percent corresponds to a z-value of 1.64, 99 percent to 2.33. Safety stock is then z × standard deviation × √lead time. If the lead time varies as well, you use the combined formula: z × √(lead time × σusage² + usage² × σlead time²). That way an unreliable supplier visibly costs you extra stock.

Service level here means the share of order cycles in which you do not run out. Going from 95 to 99 percent looks like a small step, but the safety stock rises by more than 40 percent. So set the level per item group: high for fast movers and items customers will not wait for, lower for items that are easy to deliver later.

Economic order quantity (EOQ) and its limits

The economic order quantity, also known as EOQ or the Wilson formula, answers the question of how much to order at a time. Frequent small orders cost a lot in ordering costs: time for ordering, receiving, checking and processing invoices. Large orders cost a lot in holding costs: interest on the money tied up, storage space, insurance, obsolescence and shrinkage. EOQ = √(2 × annual demand × ordering cost ÷ holding cost per unit per year) sits exactly at the point where those two types of cost are equal.

Holding costs are often expressed as a percentage of the cost price per year; a common rule of thumb is 15 to 30 percent, depending on interest, space and the risk of items becoming unsellable. Work it out for your own situation, because the EOQ is sensitive to this assumption, although less than you might think: thanks to the square root, a cost rate twice as high gives an order quantity about 30 percent smaller.

The EOQ assumes constant demand, a fixed price and unlimited shelf life. In practice you deal with volume discounts, minimum order quantities, fixed pack sizes, pallet quantities and best-before dates. So use the EOQ as a starting point: round it to a pack size, check whether a volume discount outweighs the higher holding costs, and never order more than you can sell before the best-before date.

How a WMS does this automatically

A calculation for one item is useful for understanding how it works, but a wholesaler has hundreds or thousands of items, each with its own usage, supplier and lead time. A well-configured WMS or ERP recalculates reorder points and safety stocks periodically from actual sales and receipt history, and creates purchase proposals automatically as soon as the inventory position falls below the reorder point.

In doing so, the system takes into account what makes a spreadsheet hard: seasons and trends, open purchase orders, reservations, minimum order quantities and pack sizes per supplier, and the actual lead time as it shows in the receipts. A common mistake is to set reorder points once and never adjust them, while usage and lead times change. So recalculate them at least every quarter, or let the system do it.