Reorder point formula and safety stock

Posted by Thomas

How little is too little? That’s exactly what your Reorder Point will help you determine. Let’s talk about the concept of reorder points, safety stock, and how to put those numbers together to make sure you have the right amount of stock on-hand.

Whether you’ve just started a new business or you’ve sold products for years, anyone can benefit from using the reorder point formula. This post will show you what that is, why it’s useful, and which numbers you’ll need to generate a reorder point.

How to calculate your reorder point

A reorder point is not a static number. It’s based on your own purchase and sales cycles, and it varies on a per-product basis. However, once you have a handle on the patterns of a product, you’re ready to start putting the variables together.

The reorder point formula is daily unit sales multiplied by delivery lead time, with some safety stock for good measure. 

The Reorder Point Formula as a handwritten formula. Daily Unit Sales x Delivery Lead Time + Safety Stock.

The reorder point formula video

If you’re the type who likes to watch instead of read, we’ve created a video version of this post. The examples are a little different, but the formula is exactly the same. Peter covers the reorder point formula in just three minutes:

The Reorder Point Formula | inFlow Inventory

Calculating average daily unit sales

OK! Back to the post at hand. The first variable is simply the average amount of that product you sell on any given day. Let’s examine the fictional company, Archon Optical, and their Ghost glasses. Here are the sales of the Ghost over the last three months:

If we total those numbers, we get 180 total units sold over the past 90 days.

That means that the average daily sales for the Ghost is 2 per day.

Calculating average delivery lead time

Average delivery lead time is the time it usually takes for product shipments to arrive. You should have a couple of purchase orders on-hand to check the numbers. Delivery times can vary based on the quantity you order (larger orders could take longer to ship). When you place the order also affects the lead time (compare orders during a busy season versus a slow season). There are different ways to calculate this, but a three-month average is a good start.

Here are a few Archon Optical purchase for the last three month of Ghost shipments:

Add the total delivery time (15 days ) and divide it by the number of orders (3 orders). That’s an average lead time of five days for the product to arrive.

How to calculate safety stock quickly

Safety stock is similar to a reorder point, but it’s a surplus quantity to ensure that you don’t run completely out of stock if there are delays.

When deciding on a safety stock level you’ll want to consider: average daily sales and the daily average that product used in work orders (if applicable). Lead time is also important to safety stock. We’ll keep things simple by calculating based on two weeks of extra demand (14 days).

Since the average daily sales for the Ghost are 2 (as calculated earlier on this page), that means the safety stock for Ghost is about 14 x 2 = 28.

[We’ve also written a more detailed article on safety stock, if you’d like to calculate it based on lead-time demand.]

Putting the reorder point formula together

Now that we’ve got all of the Archon Optical numbers down, we’re ready to put together a reorder point for the Ghost.

When the quantity on-hand for Ghost glasses hits 38, Archon Optical knows to place a purchase order for more. Because they’ve built an average delivery lead time into the reorder point, the extra Ghost glasses should arrive before Archon ever dips below the amount of safety stock.

Even if there are production shortages or shipping delays, Archon Optical’s safety stock ensures that they can sell Ghost glasses for two more weeks before they run out of stock.

Set a basic reordering reminder in a spreadsheet

Reorder points are vital to keeping your business running smoothly, but they’ll only work if you’re prepared to reorder on time.

If you’re a spreadsheet user, you can use conditional formatting for the quantity value of specific cells. You can set Excel or Google Sheets so that cells turn red when they hit a reorder point. This will effectively warn you when you need to start on a new purchase order.

Reorder faster with inFlow

Unlike spreadsheets, inFlow was designed specifically for working with inventory. Quantity and reorder point fields are built into the apps. This saves our customers a lot of setup time.

inFlow Cloud has a Reorder Stock window, which identifies which products need reordering, and creates new purchase orders with just one click.

If you’d like to implement reorder points with tailored suggestions for your business, we can help with that too!

inFlow Cloud has a Recommended Reorder Point report that examines your sales data and recommends reorder points for your products.

Whether you’re just starting out with reorder points or fine-tuning them, inFlow Cloud can help!

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Thomas

About Thomas

Thomas is a 100% human being who divides his time between writing medium-sized articles with his keyboard and taking large photographs with his camera.

Have a question or comment? Let us know below!

    1. Good question, Amalina. We’ll be writing a more specific article on safety stock in the future, but the quick answer is: it’s the amount of extra stock that you keep on hand to ensure that your business is unaffected by shortages in supply (for example, if your purchase order is delayed by two weeks). It’s like a rainy day fund, but for inventory.

      [Update: our safety stock article is now published at https://www.inflowinventory.com/blog/how-to-calculate-your-safety-stock/ ]

  1. Hi, please can you tell the difference between minimum stock level and the safety inventory? If there is and difference whats the essence of knowing the minimum level then? Thank you

    1. Hi Michael, the reorder point basically becomes your minimum stock level, because you’ll want to reorder once you fall *below* the reorder point. So if you had a reorder point of 20 and you reached 18 or 19 pcs on hand, you’d want to reorder. You’d be below your minimum stock level.

      Safety stock is calculated as part of that reorder point, the more safety stock you decide on, the higher your reorder point will be.

    1. Hi Tom, thanks for pointing this out! Sorry about that — we’ve made the correction in the post.
      – Thomas

  2. Question.
    The following is the consumption of rice in certain hotel.
    maximum consumption=6000kg per week.
    minimum consumption=4000kg per week.
    Reoder period 4-6 weeks
    Reorder quantity 30,000kg
    Calculate
    i)Re-order period.
    ii) Minimum stock level.
    iii)Maximum stock level
    iv)Average stock level
    How can i calculate this?

  3. Under my area working for a state agency in South Carolina, I have a main warehouse and four smaller sub-warehouses. The smaller warehouses serve specific facilities for the agency and order FROM the main warehouse.
    Can your system operate reorder points for all of the five warehouses?

    Thanks

    1. Hi Chuck,

      Sorry for the late reply on this! At present, inFlow’s reordering is company-wide. You can set reorder points for specific products, but reordering would only trigger when you drop below a company-wide stock level of X (not per location).

      If I understand you correctly, you’d find it more useful if these sub-warehouses could have their own reorder points. This is something we’re taking into consideration for future updates to inFlow, so I’ve added your vote to the list! If this changes, we’ll make sure to get in touch with you via email to let you know!

  4. Many thanks..my query is..

    where or how was 14 arrived at in determining the safety stock?

    Thanks!

  5. Dear,
    first of all I am really thankfull to you for this detail information.butt my question is that how can we decided to purchase or manufacture quantity for stock(like minimum or maximum level)

  6. The article was extremely good.it was very useful to me….
    Regarding safety stock,I have a small doubt ..why could we take up 14 days stock as safety stock,?

  7. EXPLAIN THE ROLES OF JIT AND TQM AND SUPPORTIVE SUPPLIERS RELATIONS PLAY IN MORDEN MANUFACTURING

    1. Hi Talent, thanks for reading! We’ll take those under consideration for future topics on the blog!

  8. Hi Thomas, I would like to set up par levels for a restaurant where the deliveries are made to the restaurant on a daily basis and I do have the historical usage of product for every day of the week. The goal is to have enough product at the store to meet the demand but at the same time not have too much product sitting at the store how do I achieve this?

    1. Hi Charantej, good question!

      For reordering, it’s really a balancing act. Since you have the historical usage data already, you can calculate an average daily unit sale and then factor in your lead times — basically following the formula in the article at that point.

      One point I didn’t touch on in the article was the safety stock for items with a short shelf life, like food.
      Depending on the time of ingredient, it might only last a few days, so you might have to think about a safety stock levels in terms of days (instead of ~ two weeks like the article suggested).

      After that it’s really just about watching the low points in your inventory at the end of each day. If you’re constantly running too low on an item by the end of the day, you can increase its safety stock levels.

    1. Hi there! Sorry, we don’t have an article on EOQ at the moment, but I’ll definitely consider it for the future on our blog!

    1. Hi Wisdom,
      We don’t have any on-hand experience with reordering sand, but I’d imagine it would be done by volume or by weight, and you can set up units of measure within inFlow: https://www.inflowinventory.com/support/cloud/what-if-i-sell-my-items-in-a-different-unit-than-i-purchase/

      Once you’ve set those up, you can set up a reorder point that uses the unit of measure you specify: https://www.inflowinventory.com/support/cloud/is-there-a-way-to-reorder-items-that-are-low-in-stock/

  9. Hi Thomas Wong,

    Helpful article. Please describe with example for setting up automatic reminders for reorder points by Excel.

    1. Hi Vijay, this formula is meant to help you reorder stock of physical goods before you completely run out, it isn’t necessarily meant to be applied to how many tourists might be visiting a place. I think you might have to google for another kind of formula for that, sorry!

  10. There is also a term Goods In Transit(GIT) which is subtracted from this ROL formula but its not here.how can we calculate GIT??

    1. Hi Sanila, sorry about that, this post doesn’t include GIT as part of this formula.
      But our software, inFlow Cloud, does track the status of products on order: these are products that have been ordered from a vendor but haven’t been received yet. And once you set your reorder point, inFlow will also take the goods in transit into account when suggesting what to reorder.

  11. We have consumption data and lead time for the product. Now we want to calculate minimum inventory level, Maximum inventory level, and Reorder level.

    1. Hi Mahesh, sorry, this article covers the reorder point (level) specifically. But thank you for the feedback, we’ll consider those other two topics (min/max inventory) for other articles!

  12. Hi. Very Nice Article and very Helpfull (my english not great)

    I AM EMPLOYEE IN A COMPANY. THAT HAVE 1000 OF ITEMS

    TODAY BOSS QUESTION ME HOW TO A CHECK ON REORDER LEVEL in software that we use. Software have report (Stock Less then reorder level).

    But Boss need that how can we check items that come near to reorder level means item reorder level is 500 and he says that when item quantity is near to 600 then u report me about this. how can i do this.

    thanks alot

    1. Hi Mustafa, thanks for the feedback!

      As for the question: you could set up a spreadsheet cell with conditional formatting that could turn a certain color as you get close to the reorder point, but I’m not aware of any software that does this (including inFlow).
      Rather it sounds like your boss might want a reorder point closer to 600 rather than 500, if that’s really the level that he’s worried about. Or the other thing you could tweak is how much you reorder at a time (the reorder quantity). If you keep hitting your reorder point quickly, then maybe the business could try reordering *more* product at a time.

      Sorry I couldn’t be more definitive with the response, but I hope that helps!

    1. Hi Subhankar, our article doesn’t discuss cycle time, but after some quick research, it looks like cycle time is the period between when one order is fulfilled and another order is placed.

      If we’re using that definition, a shorter cycle time would affect the number of orders you’d have in a given period…so a short cycle time would increase your average daily unit sales. A longer cycle time would decrease the average daily unit sales.

      But in the end you’d still multiply the average daily unit sales by the lead time, so the formula should still be the same, regardless of which number is larger.

  13. Hi, great formula.. its helpful
    May i know how if I have 3000 different items? is there another way to count the reorder point?

    1. Hi Christy, good question!
      We actually have a new report in our software, inFlow Cloud, that helps with this. It can take your sales numbers into account, as well as the lead time, and can suggest reorder points for your products. We’ve got more information on the feature here: https://www.inflowinventory.com/support/cloud/can-inflow-recommend-a-reorder-point-for-my-products/

      And if you’d like to try inFlow out for yourself, you can do so for free from here: https://app.inflowinventory.com/signup

  14. Wow, that was a great piece of article out there for a grab. I’m glad to have read this. Thanks for the thorough explanation.

  15. Good article but the report used is not available on the desktop version, unless there is an update I am missing.

    1. Hi Gabriel, sorry we missed this one. The Recommended Reorder Point report is a new feature we’ve added to inFlow Cloud for Windows in the past few months. I’m afraid that feature is not present in inFlow On-Premise, but the Reorder Stock window that we mention is available in both versions of our software.

  16. Good Morning,

    Dear Sir Thomas, This is Eric from Philippines.

    1st of all this tool is very helpful for us, but I would like to ask question, How to calculate the quantity to be ordered after reaching the Ordering point?

    Hoping for your reply

    Best Regards
    Eric

    1. Hi Erico, the reorder quantity can often be dictated by which vendor you’re buying from. Many vendors can have a minimum order quantity (MOQ), and our software, inFlow Cloud, has a spot specifically so that you can input the reorder quantities.

  17. Hi Thomas. Very nice article. But can you tell me how much should we order for the next batch when we hit the reorder point, as i get confused with other articles in the internet. So after i get to the reorder point how much shall i order?

    1. Hi Shashank,

      Our software, inFlow Cloud, can help with how much you should reorder based on your sales and inventory levels.

      But if you aren’t using our software yet, a good starting point would probably be to think about reordering to cover X number of days/weeks.

      So when you hit your reorder point, you could examine the average daily sales of that product.
      Then, as an example, you could use that average and multiply it by 5 to cover another week’s worth of stock, or 10 to cover two weeks of stock.
      You’ll need to tweak that number to suit your business, but having a high enough reorder point should keep you from running completely out of stock while you wait for new orders to come in.

  18. Seams that the system uses the Vendor for lead times and not the item being ordered itself?
    If I order the same item from 2 different vendors then how does that work?
    If I order for different locations how does that work?

    1. Hi Holly,

      That’s a good question and thank you for taking the time to share your thoughts.
      You’re correct that our implementation of lead time is at the vendor level and not at the item level, so we cannot currently account for multiple receiving locations or different lead times per item.
      We’d like to improve reordering within inFlow in the future, but I’m afraid I don’t have a timeline to share just yet.

      I have submitted your feedback to our team along with your email address, so someone from inFlow will get in touch if we have improvements to share down the line.

    1. Hi Lesego, the way we’ve defined the reorder point here is to basically treat it like a minimum level. So once you dip below the reorder point (in your case 100), then that is when you should order more stock.