A reorder point is the inventory level that signals it is time to place a new purchase order. It helps a warehouse avoid stockouts while also preventing too much cash from being tied up in excess inventory. Reorder points matter because customer demand continues while suppliers are producing, picking, shipping, and delivering new stock.
A good reorder point turns inventory planning into a measurable decision instead of a guess.
Key Facts
- Reorder Point = Demand During Lead Time + Safety Stock
- Demand During Lead Time = Average Daily Demand x Lead Time in Days
- Safety Stock protects against demand spikes, supplier delays, and forecast error.
- When inventory position is at or below the reorder point, a purchase order should be triggered.
- Inventory Position = On Hand Inventory + On Order Inventory - Backorders
- Higher lead time or higher demand variability increases the reorder point.
Vocabulary
- Reorder Point
- The inventory level at which a business should place a new order to replenish stock before it runs out.
- Lead Time
- The time between placing an order and receiving the inventory into usable stock.
- Safety Stock
- Extra inventory kept to reduce the risk of stockouts caused by uncertain demand or delayed supply.
- Demand During Lead Time
- The amount of inventory expected to be sold or used while waiting for a replenishment order to arrive.
- Inventory Position
- The inventory amount used for ordering decisions, calculated from on hand stock plus stock already ordered minus backorders.
Common Mistakes to Avoid
- Using on hand inventory only for the reorder decision is wrong because open purchase orders and backorders also affect the true inventory position.
- Ignoring lead time is wrong because stock continues to be consumed while the warehouse waits for replenishment to arrive.
- Setting safety stock to zero is risky because real demand and supplier performance are rarely perfectly predictable.
- Using outdated average demand is wrong because reorder points should be updated when sales patterns, seasonality, or customer behavior change.
Practice Questions
- 1 A product sells 40 units per day, lead time is 6 days, and safety stock is 80 units. Calculate the reorder point.
- 2 A warehouse has 300 units on hand, 120 units on order, and 50 backorders. Its reorder point is 400 units. Calculate the inventory position and decide whether to reorder.
- 3 A supplier becomes less reliable and lead time varies more than before. Explain how this should affect the reorder point and why.