The reorder point is the inventory level at which a business should place a new purchase order to avoid running out of stock before the replacement arrives. It is set below current stock but above zero, timed so the new order arrives just as existing inventory is depleted, accounting for both expected demand and the supplier's lead time.
FORMULA
Reorder Point = (Average Daily Usage × Lead Time in Days) + Safety Stock
EXAMPLE
A distributor sells an average of 40 units per day of a product, the supplier's lead time is 12 days, and the business holds 150 units of safety stock.
Reorder Point = (40 × 12) + 150 = 480 + 150 = 630 units.
When stock on hand drops to 630 units, a new order should go out.
Lead time, the days between placing an order and receiving it, is the single most important input, because it defines how much inventory has to last while the reorder is in transit. A supplier with a 5-day lead time allows a much lower reorder point than one with a 45-day lead time for identical demand, since less inventory needs to bridge the gap.
This is also why lead time variability, not just its average, matters. A supplier whose lead time swings between 8 and 20 days creates far more risk of a stockout than one that reliably delivers in 12 days every time, even if both average to the same 12-day lead time.
Safety stock is the buffer added on top of expected usage during lead time, protecting against two kinds of uncertainty: demand running higher than average, or the supplier's lead time running longer than expected. Without it, the reorder point only works if both demand and delivery are perfectly predictable, which they rarely are.
Setting safety stock too low risks stockouts whenever demand or lead time deviates from average. Setting it too high ties up working capital in inventory that sits idle, the same cost tradeoff described in days inventory outstanding and the cash conversion cycle.
Reorder points are not a set-and-forget calculation. Demand seasonality, new customers, discontinued products, and supplier performance all shift the correct number over time, which is why the calculation needs periodic review rather than a one-time setup.
When inventory hits the reorder point, the practical output should be an actual purchase requisition, not just an alert someone has to act on manually. The gap between a system flagging low stock and a person actually creating and approving the purchase order is exactly where reorder points fail in practice: the trigger fires correctly, but the follow-through depends on someone noticing and acting on it before stock actually runs out.
