How to calculate a reorder point
A step-by-step guide to reorder points, safety stock, and economic order quantity - so you reorder before you stock out without drowning in excess.
What you need
A reorder point balances two risks: stocking out and holding too much. To compute it you need average demand, the supplier lead time, the variability of both, and a target service level. Those inputs give you a buffer (safety stock) and a trigger (the reorder point).
Inputs per item
- Average demand per period
- Supplier lead time
- Variability of demand and lead time
- Target service level (e.g. 95%)
The formulas
Reorder point
ROP = demand_over_lead_time + safety_stock
Demand over lead time covers expected usage while you wait; safety stock absorbs variability.
Economic order quantity
EOQ = sqrt(2 × annual_demand × order_cost ÷ (carrying_pct × unit_cost))
EOQ minimizes total ordering and carrying cost; clamp it to any minimum order quantity or order multiple.
Sizing safety stock
Safety stock scales with your service level and with variability. A service level converts to a Z-factor; multiply it by the combined variability of demand and lead time to get the buffer. A volatile item or an unreliable supplier needs more buffer than a steady one at the same service level.
How Fintra automates it
Fintra forecasts demand from your own history, computes the reorder point, EOQ, order-up-to level, and service-level-driven safety stock per item, and surfaces a draft recommendation with a projected stockout date. You review and accept - it won’t place an order for you.
Frequently asked questions
What is the reorder point formula?
The reorder point equals the demand expected over the supplier lead time plus safety stock. Demand over lead time covers expected usage during replenishment, and safety stock buffers against variability in demand and lead time. When on-hand inventory hits the reorder point, you reorder.
How do you calculate safety stock?
Convert your target service level to a Z-factor, then multiply by the combined variability of demand and lead time. A common approach (King’s formula) accounts for both demand and lead-time variability, so volatile items or unreliable suppliers get a larger buffer at the same service level.
What is economic order quantity?
EOQ is the order size that minimizes the sum of ordering and carrying costs. It equals the square root of two times annual demand times order cost, divided by the carrying-cost percentage times unit cost. It’s then clamped to any minimum order quantity or order multiple.
Can Fintra calculate reorder points for me?
Yes. Fintra forecasts demand from your transaction history and computes the reorder point, safety stock, EOQ, and order-up-to level per item, surfacing a draft recommendation with a projected stockout date. You review and accept each one; it doesn’t place orders automatically.
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