How to set a reorder point for each material from your own usage and your supplier's lead time, size the safety stock that covers the variation, and choose between a min/max buffer and just-in-time buying — so you neither stock out nor tie cash up in stock you do not need yet.
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After this you can look at any material you buy and say two things about it with a
number behind them: the on-hand level at which you should place the next order,
and how big a cushion you carry for the weeks in between. You will also be able to
tell the materials you can safely buy close to need from the long-lead ones that
will run you out if you wait for the shelf to look empty.
A reorder point answers "when," not "how much"
Buying a material is really two decisions, and mixing them up is where most
stockouts start. One decision is how much to order — a full pallet, a month's
worth, a truckload to earn a price break. The other is when to place that order.
This lesson is entirely about the second one.
That trigger has a name. A
is
the level of stock on hand that tells you it is time to buy again. Set it too low
and the material runs out before the next delivery lands. Set it too high and you
are constantly buying early, filling shelves with cash you could have kept. Get it
right and the order goes in at the last responsible moment and the delivery shows
up just as you are drawing down the last safe cushion.
The reason you cannot just reorder "when it looks low" is that low is different for
every material — because every supplier takes a different amount of time to
deliver.
The formula: usage during the wait, plus a cushion
The reorder point is built from three numbers you already have or can measure:
reorder point = usage rate × lead time + safety stock
Your tells you how fast the shelf empties.
The tells you how long you have to
cover before the replacement arrives.
The is the margin for everything that does not go to
plan.
Multiply usage rate by lead time and you get the amount you will burn through
while you wait for the order. Add the safety stock and you have the level at which
you must reorder to make it to the next delivery with a cushion to spare.
Here is a worked example with illustrative numbers — plug in your own. Say a
granola line uses about 500 stand-up pouches a week, the pouch supplier's lead
time is 3 weeks door to shelf, and you decide to carry 1 week of cover as
safety stock:
Usage during the wait: 500 × 3 = 1,500 pouches.
Safety stock: one week of usage = 500 pouches.
Reorder point: 1,500 + 500 = 2,000 pouches.
So when you count down to 2,000 pouches on hand, you place the order. Over the
three weeks it takes to arrive you use roughly 1,500, and you touch down at about
500 — your cushion — right as the new stock lands.
Keep usage rate and lead time in the same unit of time
The single most common way this formula goes wrong is a units mismatch —
multiplying a daily usage by a lead time counted in weeks, or the reverse.
The two numbers must share a time unit before you multiply. Weekly usage pairs
with a lead time in weeks; daily usage pairs with a lead time in days. Convert
one before you do the math, or your reorder point will be off by a factor of
seven.
Safety stock: what you pay to avoid being caught short
If usage and lead times were perfectly steady, you would need no safety stock at
all — the plain usage rate × lead time would land you at exactly zero the day the
truck arrives. They are never that steady. A big new order spikes your usage for a
week. A supplier's truck breaks down and the three-week lead time becomes four.
Safety stock is the buffer that absorbs both without a
.
It is a paid-for buffer, though, and the price runs two ways. Every extra week of
safety stock is cash sitting on a shelf instead of in your account — the same
working capital the cash-flow
lesson
walks through. And for anything perishable, more buffer means more of it aging
past its date before you reach it, which is exactly the
FEFO problem
of the oldest stock expiring at the back of the cooler.
So size safety stock to the material, not by reflex:
For a cheap, stable, long-shelf-life material — salt, a standard corrugated
case — a generous cushion costs you almost nothing, so carry plenty.
For an expensive or perishable material, keep the cushion tight and lean on a
reliable, short-lead supplier instead of a deep shelf.
A simple, honest way to set it is days of cover: decide how many extra days of
usage would carry you through a realistic bad week — a usage spike plus a late
truck — and hold that. More precise statistical methods exist, sizing the buffer
from how much your demand and lead time actually swing, and they are worth
graduating to once you have clean usage history. The days-of-cover version is
enough to stop the stockouts while you get there.
Long-lead materials need an alert, not an eyeball
Some materials arrive in days. Others — an imported ingredient, a custom-printed
film, a specialty culture or botanical — carry lead times of eight, ten, twelve
weeks. The formula handles them fine: a longer lead time simply pushes the reorder
point higher. The trouble is that a high reorder point is invisible to the way most
floors actually notice they are low.
Walk the shelf and a bin that still looks half full reads as "fine." But for a
material with a ten-week lead time, half full may already be past the point where
you had to order. By the time it looks alarming, you are two months from a
delivery and there is nothing purchasing can do to pull it forward. Long-lead
materials stock you out precisely because the danger is invisible on the shelf.
These are the materials that need a standing signal rather than a glance — a flag
when on-hand drops to the reorder point, a recurring calendar check, a line on the
purchasing review you never skip. It does not matter whether that signal is a
report, a note, or a column in a spreadsheet, as long as something watches the
number for you instead of relying on the bin looking empty. The longer the lead
time, the more the alert earns its keep.
Min/max or just-in-time: choose per material
There are two common styles for running replenishment once you know the reorder
point, and neither is right for everything.
The first is .
The min is your reorder point; the max sets how much you buy. When on-hand hits
the min, you order enough to reach the max — a rule simple enough for anyone on the
floor to run. It leans toward carrying more stock, which makes it resilient and
forgiving. It suits cheap, stable, long-shelf-life materials where a deep buffer is
cheap insurance.
The second is . It keeps working capital free and spoilage low,
but it is less forgiving: one late delivery or one demand spike and you are short.
It suits expensive or perishable materials whose suppliers are reliable and whose
lead times are genuinely short.
The trade-off is the same one every time — cash and spoilage risk on one side,
resilience against disruption on the other. You do not pick one for the whole
operation. You pick per material: a deep min/max buffer on the cheap, steady
staples, and tighter, just-in-time buying on the costly and the perishable.
Usage is not flat: buy ahead of your season
Everything above assumes a usage rate you can trust. For a seasonal operation, the
year-round average is a trap. A hot-sauce maker whose demand triples in the fourth
quarter, a bakery that empties its shelves before every holiday — their real usage
rate is not one number, it is a curve.
A reorder point set on the flat annual average does two harmful things at once. It
stocks you out going into the peak, because true usage has jumped well above the
average the point was built on. Then it overstocks you coming out of the peak,
leaving cash and aging inventory on the shelf as demand falls back. Both are
expensive, and both are avoidable.
The fix is to move the reorder point ahead of the season instead of chasing it.
Look at last year's actual usage through the same weeks — your own history is the
most reliable forecast you have — and step the reorder point up before demand
climbs, so the extra stock is on hand when the orders arrive. Step it back down as
the season ends, so you are not carrying peak-season buffers into a slow quarter.
For long-lead materials this is not optional: if a key ingredient takes ten weeks
to arrive, the decision to cover your December peak has to be made in September.
Reorder points tell you when to buy each material. The next thing that has to
hold as your volume climbs is how you buy — moving from ad-hoc ordering to
purchase orders, approved suppliers, and receipts matched against what you actually
agreed to pay — so that the discipline you have just put behind timing is matched
by discipline behind the buying itself.
