A reorder point (ROP) is the inventory level at which a new replenishment order should be placed. When stock of an item falls to this level, the business orders more so that the new delivery arrives before existing stock runs out.
The reorder point is set separately for each stock-keeping unit (SKU), based on how fast the item sells or is consumed and how long it takes to replenish.
Why Is Reorder Point Important?
The reorder point is one of the basic controls of inventory management. Set it too low and the business runs out of stock while waiting for the next delivery. Set it too high and it carries more inventory than it needs, tying up cash and warehouse space.
A well-set reorder point helps to:
- Prevent stockouts of fast-moving and critical items
- Reduce excess inventory and the storage and holding costs that come with it
- Automate replenishment in ERP and warehouse management systems, which can trigger purchase orders when stock hits the ROP
- Protect service levels for customers and production lines
- Balance working capital by ordering based on actual consumption rather than guesswork
How Is Reorder Point Calculated?
Basic formula: Reorder Point = Average Daily Demand × Lead Time (in days)
This covers the stock that will be used while the order is on its way.
Formula with safety stock: Reorder Point = (Average Daily Demand × Lead Time) + Safety Stock
Safety stock is added to protect against demand spikes or supplier delays. Most businesses use this version.
Formula for variable demand and lead time:
When both demand and lead time fluctuate, safety stock is calculated statistically using the desired service level (Z-score), the standard deviation of demand, and the standard deviation of lead time. The result is then added to lead time demand.
Process:
- Calculate average daily demand from sales or consumption history.
- Confirm the supplier’s actual lead time, not only the quoted lead time.
- Calculate lead time demand (demand × lead time).
- Set safety stock based on demand variability, lead time variability, and the target service level.
- Add lead time demand and safety stock to get the reorder point.
- Review the ROP regularly, especially after changes in demand, seasonality, or suppliers.
Key Factors in Reorder Point Calculation
- Average daily demand: The typical number of units sold or used per day.
- Lead time: The number of days between placing an order and receiving it.
- Lead time demand: The stock expected to be consumed during the lead time.
- Safety stock: Buffer inventory held to cover unexpected demand or delays.
- Service level: The target probability of not running out of stock during a replenishment cycle, which determines how much safety stock is held.
Reorder Point Example
An FMCG distributor in Nagpur stocks a fast-selling packaged food item. Its figures are:
- Average daily demand: 120 cartons
- Supplier lead time: 8 days
- Safety stock: 300 cartons
Lead time demand = 120 × 8 = 960 cartons
Reorder Point = 960 + 300 = 1,260 cartons
When stock of this item drops to 1,260 cartons, the distributor places a new order. If the supplier delivers on time and demand stays at average, the distributor will have about 300 cartons left when the new stock arrives. If demand rises or the truck is delayed, the safety stock covers the gap.
(Figures are illustrative.)
Related Terms
- Safety Stock
- Lead Time
- Economic Order Quantity (EOQ)
- Stockout
- Demand Forecasting
- ABC Inventory Analysis
- Inventory Turnover
- Vendor Managed Inventory (VMI)
Sources
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FAQs
Q1. What is the difference between reorder point and safety stock?
Safety stock is the buffer held for uncertainty. The reorder point is the trigger level for placing an order, and it includes safety stock plus the stock expected to be used during the lead time.
Q2. What is the difference between reorder point and reorder quantity?
The reorder point tells you when to order. The reorder quantity, often calculated using Economic Order Quantity (EOQ), tells you how much to order.
Q3. How often should the reorder point be updated?
It should be reviewed whenever demand patterns, lead times, or suppliers change. Seasonal items may need different reorder points for peak and off-peak periods.
Q4. Can a reorder point be used for every item?
It works best for items with steady, measurable demand. For new products, highly seasonal goods, or made-to-order items, businesses often combine reorder points with demand forecasting or other planning methods.