Safety Stock and Reorder Point Formulas: How Much to Order from a Supplier

A shop runs on chipboard sheets that last 8 days, and the supplier delivers a new batch in 10. An order placed on time by the calendar arrives late, and an order placed by stock level arrives on time. That is why the question of how to buy materials correctly comes down to two formulas and one check.

The reorder point equals average daily usage multiplied by lead time, plus safety stock. Safety stock equals maximum daily usage over the maximum lead time minus average daily usage over the average lead time. Together they say when to order, and the planning horizon sets how much.

What is minimum stock and how does it differ from the reorder point?

In shops, minimum stock means two different things. Some call it the safety stock below which the warehouse should not fall. Others mean the level at which the buyer gets a signal. The first number is lower, the second higher, and confusing them causes either downtime or excess.

Safety stock exists for a supplier delay or a spike in consumption. The reorder point is higher, because it includes the material the shop will use while the delivery is on its way. If you order only when stock equals safety stock, the delivery arrives when the safety stock has already been used up.

The calculation needs five inputs: average daily usage from the quarter’s write-off history, maximum daily usage, the normal lead time, the supplier’s worst lead time on record, and current balance together with deliveries in transit.

How do you calculate safety stock?

There are two ways. The first accounts for both consumption peaks and supplier delays. The second, simpler, sets stock in days of usage.

Formula 1. Safety stock = (maximum daily usage × maximum lead time) − (average daily usage × average lead time).

Formula 2. Safety stock = average daily usage × number of buffer days.

The example is fictional: a shop uses 16 mm chipboard. Over the last three months 480 sheets left the warehouse over 60 working days, so average usage is 480 / 60 = 8 sheets a day. On the busiest day the shop took 12 sheets. The supplier normally delivers in 10 days, and the longest delivery on record was 14 days.

By formula 1, safety stock is 12 × 14 − 8 × 10 = 168 − 80 = 88 sheets. That is 88 / 8 = 11 days of average usage. By formula 2 with a 5-day buffer it would be 8 × 5 = 40 sheets. The gap between 88 and 40 shows how much stock it takes to protect against the worst case on both measures at once. A 5-day buffer covers a 5-day supplier delay and no peak, while 88 sheets cover both.

How do you find the reorder point?

Reorder point = average daily usage × lead time + safety stock.

For the example above that is 8 × 10 + 88 = 80 + 88 = 168 sheets. When the balance, adjusted for deliveries in transit and net of reservations, falls to 168, the buyer creates an order.

Test the figure on two scenarios. In the normal case a delivery takes 10 days at 8 sheets a day. The shop uses 80 sheets in that time, and 168 − 80 = 88 are left, which is the full safety stock. In the worst case a delivery takes 14 days and the shop takes 12 sheets a day. It uses 12 × 14 = 168 sheets, so the balance is 168 − 168 = 0. Zero in the worst case means safety stock is calculated exactly and there will be no downtime.

The comparison also shows the price of reliability. If the supplier shortens the longest delivery from 14 to 11 days, safety stock under formula 1 falls to 12 × 11 − 8 × 10 = 132 − 80 = 52 sheets. The difference of 36 sheets at €36 a sheet is €1,296 of working capital that stops sitting in the warehouse.

How do you tell that it is time to order?

Compare the balance adjusted for reservations and deliveries in transit. Position = physical balance − reservations + expected deliveries.

Suppose the warehouse holds 120 sheets, 30 are reserved for customer orders, and another 50 are on the way under an order created earlier. The position is 120 − 30 + 50 = 140 sheets. That is below the reorder point of 168, so an order is needed today, even though 120 sheets lie on the shelf and visually “there is still enough”.

How do you buy materials correctly and how much do you order?

The order size must cover demand over the planning horizon and bring stock back to the safety level. In Bimp this calculation is written as a formula: Need to purchase = Min balance + Reserves + (Demand rate × Planning depth) − Physical balance − Expected deliveries.

Substitute the example data. Take the min balance equal to the safety stock, 88 sheets. Reserves are 30, demand rate 8 sheets a day, planning depth 31 days (the default), physical balance 120, expected deliveries 50.

The calculation step by step. 88 + 30 = 118. 118 + 248 = 366. 366 − 120 = 246. 246 − 50 = 196. The buyer orders 196 sheets. If the supplier’s minimum lot is 100 sheets, the order is rounded up to 200, and to the same 200 if delivery is by pallets of 50.

The 31-day horizon sets how far ahead the buyer commits cash. Cutting the horizon to 14 days would reduce the demand component from 248 to 8 × 14 = 112 sheets, and the need to 88 + 30 + 112 − 120 − 50 = 60 sheets. That means more frequent and smaller orders, more work for the buyer and less cash in the warehouse.

Where do you get average usage and why is it often inaccurate?

Average usage is calculated from write-offs. Sales of finished products and the production plan give a different figure, because material is written off only when a product has passed through production, so a month with downtime gives an understated figure and a month with catch-up an overstated one. For a stable item, take a period of a quarter or more, and for a seasonal one the same season of the previous year.

In the example above, 480 sheets are divided by 60 working days. Dividing by 90 calendar days would give 480 / 90 = 5.3 sheets a day. The reorder point would drop to 5.3 × 10 plus the buffer, and the shop would regularly wait for delivery with an empty warehouse. Non-working days in the denominator understate demand, so use the shop calendar of actual working days.

Do not take maximum daily usage from one abnormal day. If the shop took 12 sheets once in a quarter for a rush order and the usual peak is 9, safety stock calculated on 12 will be excessive, and the buyer and the process engineer decide this together.

What do you do with new and rare materials?

A new material has no write-off history, and the formula is replaced by an estimate from the specification. Take the norm per product and the planned number of products per month, and divide by working days. Set safety stock in days, for example 5, and adjust it after two or three deliveries, once actual usage appears.

Rare materials bought for one specific order do not fit the formula. They are bought as the order requires, with a reservation for it, and a reorder point makes no sense for such an item. Materials bought continuously and materials bought for orders are best kept in separate groups, so the calculations for the first do not distort the orders for the second.

What does an item card for the buyer look like?

One row per material is enough. A completed example is below.

Review the parameters when the supplier, the seasonality of demand or the lead time changes. For the general logic of keeping materials on the shelf, see the article on raw materials inventory management.

What does Bimp do and what does it leave out?

Bimp is a Ukrainian cloud ERP for manufacturers. In the product card, in the “Planning” section, you set “Demand rate per day” (if you leave 0, the system calculates it from the previous month’s sales), “Safety stock, days” and “Delivery time, days”. In the “Accounting” section are “Min balance” and “Max balance”. Then in Purchases, on the “Purchase planning” tab, the “Need to purchase” column shows the demand for the date chosen in “Plan until”. Expected deliveries from orders already created are subtracted, so the buyer does not duplicate orders. Setup is described in Purchase planning.

The demand is passed to a supplier order through Excel. You filter the report by supplier, export it, create a supplier order and load the file with the Import button. Item names in documents come from supplier products, so a delivery note with a different name does not confuse the storekeeper. The free quantity available for sale, net of reservations, is visible in the Stock with Reserve report.

What is not there. The system does not pick maximum daily usage and the longest delivery from history, and the buyer determines and enters those numbers. The size of the supplier’s minimum lot and rounding to a pallet also remain a person’s decision. Demand from the planning report passes into the order through Excel. For a wider view of procurement features, see the Procurement page.

The first item set up by these formulas shows the price of reliability. Safety stock of 88 sheets at €36 a sheet means €3,168 that sit in the warehouse all the time, and the buyer decides whether that sum is worth paying for the absence of downtime.

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