What is a reorder point?

The reorder point is the stock level that triggers the next order. When the stock on hand plus what is already on order (minus any backorders) falls to it, you order. It has two parts: the demand you expect while the order is on its way, and the safety stock for demand and lead times above that.

reorder point = average daily demand × lead time in days + safety stock

Example (in the tool). 1,000 units a month is 32.9 a day; over a 21-day lead time that is 690 units. With 436 units of safety stock for a 95% cycle service level, the reorder point is 690 + 436 = 1,126 units.

The reorder point says when to order; how much to order is a separate choice, such as the EOQ or the supplier’s minimum order quantity.

Checking stock on a schedule instead. If you look at the stock only every R days (a weekly or fortnightly order), the buffer has to cover R + L days, not L, and the rule becomes an order-up-to level: order whatever brings the stock back up to it. With a 14-day review in the same example the safety stock rises to 517 and the order-up-to level is 1,668.

Sources

• Caplice, C. (2006). ESD.260 Logistics Systems, Lectures 11 and 12: probabilistic demand, (s, Q) and (R, S) policies. MIT OpenCourseWare.