The reorder point formula
Lead-time demand
Average daily demand × lead time in days. 20 units × 7 days = 140 units.
Safety stock
By service level: Z × standard deviation of daily demand × √lead time. Or: (max daily demand × longest lead time) − (average × usual lead time).
Reorder point
Lead-time demand + safety stock, rounded up. When stock reaches it, order.
Z values for common service levels
The service level is the share of order cycles without a stock-out.
| Service level | Z |
|---|---|
| 90% | 1.2816 |
| 95% | 1.6449 |
| 97.5% | 1.96 |
| 98% | 2.0537 |
| 99% | 2.3263 |
| 99.9% | 3.0902 |
FAQ
What is a reorder point?
The stock level at which you place a new order, so what is left lasts until the delivery arrives, with a buffer for swings.
How do I calculate safety stock?
If you know the standard deviation of daily sales: Z × deviation × √lead time. If not, use “Max − average” from your highest usage and longest lead time.
Where do I get the standard deviation of demand?
From a few weeks of daily sales: in Excel use STDEV.S on the daily sales column.
What if the lead time varies too?
Enter its standard deviation in the optional field and the combined formula is used: Z × √(lead time × demand deviation² + average demand² × lead-time deviation²).