Work out the stock level at which you should place the next order, and how much buffer to hold behind it. Enter how fast the product sells, how long the supplier takes, and how bad a stockout would be, and this returns the reorder point, the safety stock and the days of cover you are actually buying.
A reorder point is not a gut feel about looking a bit low. It is the amount you will sell during the time it takes the new stock to arrive, plus a buffer for the weeks when you sell more than usual or the supplier is slower than promised. Below that number you are gambling; above it you are paying to store something you could have bought later.
The part most sellers skip is the variability. Average demand and average lead time give you an average outcome, which by definition you miss half the time. Safety stock is what covers the other half, and the amount depends on how erratic your sales are, how reliable the supplier is, and how much you care about being out of stock. A product you can afford to run out of needs almost none. A hero product that carries the whole catalogue needs a lot.
Everything here is in units and days, so it works the same whether you sell three a week or three hundred. If you do not know your demand variability, the standard deviation field accepts a rough guess: a stable seller runs at about a fifth of the average, an erratic one at half or more.
A rough guess is fine. A steady product runs at roughly a fifth of the daily average, an erratic one at half or more. Zero means you are certain demand never varies, which it does.
What the numbers mean
| Term | What it is |
|---|---|
| Lead time demand | What you expect to sell between placing the order and receiving it. Average daily sales times the lead time. |
| Safety stock | The buffer that covers a busy fortnight or a late shipment. It grows with how erratic either one is, and with how sure you want to be. |
| Reorder point | Lead time demand plus safety stock. When stock on hand reaches this number, place the order. |
| Days of cover | How long the reorder point lasts at the current rate. A useful sanity check: if it is far longer than the lead time, the buffer is doing a lot of work. |
Three things that break the calculation
A promotion is not average demand. Run the numbers on ordinary weeks and treat a sale, a launch or a seasonal peak as a separate order placed deliberately. Feeding a spike into the average inflates the buffer for the whole rest of the year.
Lead time is not the factory's quote. It is the time from you pressing send to the stock being sellable, which includes the supplier's own delay, the shipping, customs and however long it sits in your receiving area. Measure the whole thing or the buffer will be short by the part you left out.
Higher service levels get expensive quickly. Moving from 95 to 99 per cent does not cost a little more stock, it costs a lot, because the buffer scales with the tail of the distribution rather than with the middle. Reserve it for the products that actually deserve it.