Reorder points explained in plain English

A reorder point is the stock level that tells you to place an order. Wikipedia defines it as the level of inventory which triggers an action to replenish that particular inventory.¹ When the count falls to that number, you order. Not before, not after.

The basic formula

The same page gives it as a sum: normal consumption during the lead time, plus safety stock.¹ Two terms need explaining.

Lead time is the amount of time between placing an order and receiving the goods.¹ It's the supplier's delay, not your sales cycle.

Safety stock is an additional quantity of an item held to reduce the risk that the item will be out of stock.² Think of it as a cushion for a slow delivery or a busy week.

So the shop version reads:

Reorder point = (average daily sales × lead time in days) + safety stock

A worked example

The source gives a small one. If average daily usage is 50 units and the lead time is seven days, the level is 50 units per day × 7 days = 350 units.¹ That figure leaves out the cushion. The page also gives the simpler formula as average daily usage rate × lead-time in days, with no buffer.¹ Add your safety stock on top.

Your own numbers will be smaller, and you'd be using your own sales. But the steps are identical:

1. Work out average daily sales for the product from a recent period.
2. Ask the supplier, or check past deliveries, for the lead time in days.
3. Multiply the two.
4. Add a safety stock figure you've chosen.
5. Compare the total with your on-hand count each time you check stock.

Choosing safety stock

There's no single right answer, and that's the honest part. The trade-off is plain. Too much safety stock can mean high holding costs.² Too little can mean lost sales and a higher rate of customer turnover.²

Some businesses set safety stock from a service level, which is how often they accept running out. The lower the service level, the lower the requirement for safety stock.² Statistical formulas exist for this. They use the spread of demand and of lead times, and they're harder to do by hand. A small shop can pick a number of days of cover by judgement, then adjust it after a few orders.

Perishable goods need extra thought. Time-sensitive goods such as food and drink could spoil and go to waste if held as safety stock for too long.² If you stock food, follow your local food-safety authority's rules on dates.

Where the formulas fail

The formulas assume demand stays steady. The safety stock page warns that for seasonal demand (high in summer, low in winter), the formula will consistently produce stock outs in summer and waste in winter.² It adds that no universal formula exists for safety stock.²

That matters when you check an AI tool. If a tool gives you a reorder point, ask which sales period it used and what lead time it assumed. Then redo the sum yourself for one product. If your answer is far off, the tool probably used a different lead time or a window that included a rush.

Next, Asking an AI tool to suggest reorder quantities shows how to give a tool these inputs and test what comes back.