# The reorder point formula and safety stock

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.

When you start your business off you’re probably making orders based on your gut instinct and the money you have on hand, but your reordering can be even more efficient with a reorder point formula. This post will show you what that is, and what numbers you’ll use to come up with a reorder point.

## How can I calculate my reorder point?

The thing to know about a reorder point is that it’s 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 patterns in your purchase and sales orders for a particular product, you’re ready to start putting the variables together.

The reorder point formula is:

## Calculating average daily unit sales

Take the case of 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 190 total units sold over the past 90 days. That means that the daily sales for the Ghost is 2.11 per day.

## Calculating average delivery lead time

Average delivery lead time is simply the amount of time it usually takes for your shipments of a particular product to arrive. You’ll want to have a couple of purchase orders on-hand to check the numbers for this, as the delivery times can vary based on the quantity you order, as well as when you order it. There are a few different ways to calculate this, but averaging things out over the past few months can help provide some context.

In the case of Archon Optical, here are a few purchase orders for the last three month of Ghost shipments:

If you add the total delivery time (15 days ) and divide it by the number of orders (3 orders), then that’s an average lead time of five days for the product to arrive.

## Calculating safety stock based on extra days of demand

The idea of safety stock is similar to the idea of a reorder point, which is the stock quantity at which you will generate a new purchase order for that product. A reorder point can be the same as your safety stock number, but it’s usually higher to factor in the lead time.

Some numbers you’ll want to take into account as you decide on a safety stock level are: average daily sales and the daily average that product used in work orders (if applicable), as well as the lead time. but for this article, 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 2.11 (as calculated earlier on this page), that means the safety stock for Ghost is about 14 x 2.11 = 29.54.
Or 30 if you round the number up.
After all, nobody really orders 0.54 pairs of glasses.

[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 numbers 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.

This means that, once the quantity on-hand for the Ghost glasses hits roughly 40 or 41, the people at Archon Optical know to put in another purchase order for more of the product. 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.

However, even if there are production shortages or delays in shipment, Archon Optical’s safety stock ensures that they can continue to sell the Ghost for two weeks before they run out of stock.

## Setting up automatic reminders for reorder points

Reorder points are incredibly powerful for keeping your business running smoothly. It’s one thing to understand the concept, but they’re no use to you if you aren’t set up to reorder in a timely manner.

If you’re a spreadsheet user, you can use conditional formatting for the quantity value of specific cells. It’s a bit of work up front because you’ll have to set it up for each individual cell, but you can set Excel or Google Sheets so that cells turn red the moment they dip below your reorder point, which will warn you when you need to start on a new purchase order.

## Remember to reorder with inFlow

You can make reordering easier and more efficient with inFlow Cloud. All you have to do is attach a reorder point to your products.

When you get low, inFlow will show them on a special screen so you can reorder them with just one click.

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.

Thank you

Article Feedback*thanks alot

3. Amalina says:

What is safety stock?

1. Thomas Wong says:

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/ ]

4. Michael says:

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. Thomas Wong says:

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.

5. Mohamed says:

Many Thanks

6. Tom says:

Hey man,

You could only have 29.54 stock left if someone ordered .46, not .54 as you wrote in the article!

1. Thomas Wong says:

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

7. Boniface Kinyua says:

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?

1. Thomas Wong says:

Hi Boniface! Sorry, this post doesn’t deal with max stock levels, but rather the minimum threshold before you *should* reorder.
If you’re looking for a min/max approach, you might need a different article for this question (I did a quick search, and this one may help: https://www.lokad.com/min-max-inventory-planning-definition).

8. Zia Ullah says:

Its too good and very easy to understand thank u very much for this good efforts dear.

9. Chuck Meathrell says:

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. Thomas Wong says:

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!

10. Chris says:

1. Thomas Wong says:

Thanks Chris, what kind of question did you have about reorder points?

11. ramon p. bongat says:

Many thanks..my query is..

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

Thanks!

1. Thomas Wong says:

Hi Ramon, the 14 days was a simplified estimate based on having two weeks of stock, which is what we’ve seen from other small businesses. However, another way to estimate safety stock is to think of it as a percentage of your lead-time demand. We go into a bit more detail about that in this article: https://www.inflowinventory.com/blog/safety-stock-calculation/

12. Taha Tanveer says:

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)