Reorder Point in 7 Minutes
EOQ tells you how much to order. The reorder point tells you when. It is the inventory level at which you place a new order so the delivery arrives just as stock runs out. With steady demand, it is simply daily demand times the lead time.
What you will learn
- What the reorder point is and how it differs from EOQ
- What lead time and lead time demand mean
- How to calculate the reorder point with steady demand
- How to keep units consistent between demand and lead time
The formulas
- d
- average demand per day (or per week)
- L
- lead time in the same time units
- Working days per year
- number of days the business operates
Worked example
A shop sells 40 units a day, and the supplier takes 5 days to deliver after an order is placed. At what inventory level should the shop reorder?
- Daily demand d = 40 units.
- Lead time L = 5 days.
- ROP = 40 × 5 = 200 units.
- When stock falls to 200, place the order; it arrives just as stock hits zero.
Answer: Reorder when inventory drops to 200 units.
Common questions
What is the formula for reorder point?
With steady demand and no safety stock, the reorder point equals average demand per period multiplied by the lead time in the same periods. If demand is uncertain, add safety stock on top of that lead time demand.
What is lead time demand?
Lead time demand is how many units you expect to sell between placing an order and receiving it. It equals demand per day times lead time in days, and it is the core of the reorder point.
What is the difference between EOQ and reorder point?
EOQ answers how much to order each time. The reorder point answers when to place the order. They are used together: when stock falls to the reorder point, you place an order of EOQ units.
How do you find daily demand from annual demand?
Divide annual demand by the number of days the business operates in a year. For example, 12,000 units over 300 working days is 40 units a day. Check which day count the question uses.