Reorder point and safety stock: formulas and examples

The reorder point (ROP) is the stock level at which you place a new order so that it arrives before you run out. It equals the demand expected during the supplier's lead time plus safety stock. Safety stock protects against demand spikes and delivery delays, both common for Philippine businesses dealing with port congestion, typhoons and inter-island shipping.

Reorder point = average daily demand × lead time in days + safety stock

Step 1: Average daily demand

Use recent sales or usage, adjusted for seasonality. For a branch selling 1,200 units over the last 30 days, average daily demand is 40 units. Use each branch's own data; national averages mislead.

Step 2: Lead time

Lead time is the time from placing an order to having goods available for sale or use, including approval, supplier processing, shipping and receiving. If a supplier usually delivers in 7 days, lead time is 7 days. For imported goods or inter-island shipping, lead time and its variability are much larger.

Step 3: Safety stock

Simple method

Safety stock = (maximum daily demand × maximum lead time) − (average daily demand × average lead time)

Example: maximum daily demand 55 units, maximum lead time 10 days, average demand 40, average lead time 7. Safety stock = 55 × 10 − 40 × 7 = 550 − 280 = 270 units. Reorder point = 40 × 7 + 270 = 550 units.

The simple method is easy but often produces high safety stock.

Statistical method

Safety stock = Z × standard deviation of daily demand × √lead time

Z reflects the desired service level (about 1.65 for 95%, 2.33 for 99%). Example: standard deviation of daily demand 8 units, lead time 7 days, 95% service level. Safety stock = 1.65 × 8 × √7 ≈ 35 units. Reorder point = 280 + 35 = 315 units.

If lead time also varies, use a formula that includes lead time variability, or increase safety stock for unreliable suppliers.

Step 4: How much to order (EOQ)

The economic order quantity balances ordering cost against holding cost:

EOQ = √(2 × annual demand × cost per order ÷ annual holding cost per unit)

Example: annual demand 14,600 units, cost per order ₱1,500, holding cost ₱20 per unit per year. EOQ = √(2 × 14,600 × 1,500 ÷ 20) ≈ 1,480 units.

In practice, adjust for supplier minimums, case packs, truckloads and price breaks.

Service level by item class

Not every item deserves the same protection. Combine ROP with ABC classification (see cycle counting):

Keeping parameters current

Demand and lead times change. Review reorder points monthly for A items and quarterly for others, and immediately after promotions, new branches or supplier changes. Systems should recalculate suggested reorder points from recent data and let planners approve changes.

From reorder points to purchase orders

When stock falls below the reorder point, the system suggests a purchase requisition or a transfer from a warehouse with excess. Planners review and approve, then purchasing converts it into a PO. Read demand planning for forecasting beyond simple averages.

Where Cirquolus fits

Cirquolus Inventory management gives branch stock visibility and product movement, connected to purchasing and warehousing, so replenishment decisions use current stock and sales by branch.

Frequently asked questions

What is the reorder point formula?

Reorder point = average daily demand × lead time (days) + safety stock.

How do you calculate safety stock?

A simple method is (maximum daily demand × maximum lead time) − (average daily demand × average lead time). A statistical method uses demand variability and a service level factor.

What is EOQ?

Economic order quantity: the order size that minimizes the combined cost of ordering and holding inventory.

Should every branch have its own reorder point?

Yes. Each branch has different demand and often different lead times, so reorder points should be set per branch.