Safety Stock, Reorder Point & Lead Time: How to Calculate With Formulas

Safety stock is the amount of inventory a business needs to have to achieve a certain level of risk
mitigation when it comes to stock-outs. There are typically two types of inventory: core and
seasonal. Core inventory is inventory that remains in-stock all year round. Seasonal inventory
consists of products you bring in for a specific period of time.

Safety stock is also called:

 Buffer inventory/stock
 Safety stock inventory/stock
 Buffer inventory/stock
 “Just in case” inventory/stock

 The reorder point is calculated using the safety stock metric. It tells a business at what point it is
time to place a new order to restock inventory, along with the minimum order and display
quantities. This metric accounts for lead time, helping businesses to avoid costly stock-outs.

The importance of safety stock and reorder point

Stock-outs are a costly problem for retail businesses. Out-of-stocks happen because of many
reasons, including:

 Improper, ineffective or inaccurate inventory and operations management practices

 Spikes in customer demand
 Poor demand forecasting and inventory accounting
 Disruptions in production process
 Changes in lead time from suppliers
 Internal communication challenges

And when stock-outs happen, retailers aren’t only missing out on sales. They’re also creating a
poor customer experience, and possibly pushing potential lifelong customers to competitors.
Safety stock and reorder point help businesses face these challenges head-on, and maintain a
consistent customer experience while also capturing sales — and minimal wasted warehouse
space.

How to calculate safety stock

There are two ways to calculate safety stock: one with standard deviation, and one without. First,
we’ll look at the more simplified version.

Using the basic safety stock formula

The basic safety stock formula is:

 Safety stock = (max daily sales * max lead time in days) – (average daily sales * average
lead time in days)

 Daily sales: total $ in sales per day

 Lead time: amount of time it takes from placing an order to receiving product from
supplier

Therefore, the maximum is the highest daily sales and/or longest lead time for that time period,
while the average is exactly that.

Here’s an example to illustrate the basic safety stock calculation:

You sell 125 units every day, on average. Your best day was 300 units sold. From the time you
place an order, it takes 15 days for the product to arrive in your warehouse, on average. There
have been times where this has been as quickly as 5 days, and others (like pre-holiday) where it’s
taken as long as 30 days.

To get your safety stock, you’d do the following:

Safety stock = (300 * 30) – (125 * 15) = 9000 – 1875 = 7125

Your ideal level of safety stock is 7,125 units.

Using standard deviation to calculate safety stock

The safety stock formula with standard deviation is more complicated but also more accurate. It
accounts for variations in metrics. The formula goes like this:

Safety stock = desired service level * standard deviation of lead time * demand average

Here’s what each of those variables mean:

 Desired service level: A business’s targeted probability that the inventory on hand is
enough to meet actual customer demand. To get this number, you’d balance inventory costs
against the cost of a stock-out.

 Standard deviation of lead time:  Lead time is how long it takes from placing an order
to receiving product from a supplier. While suppliers may quote a lead time, in reality, this
number fluctuates. The standard deviation of lead time accounts for these variations from the
norm.

 Demand average: The average quantity of products purchased by customers during a

period of time.
 Let’s assume that the desired service level is 90% (a 90% desired service level would be a 1.28
Z-score) with the standard deviation of lead time to be 16 days and demand average to be 125
units of units per day, calculation will be like this:

Safety stock = 1.28 * 16 * 125 = 2560

How to calculate reorder point

Reorder point inventory refers to the level of inventory at which you’ll reorder to be able to meet
demand and optimize inventory control.

The ROP formula takes the safety stock, as well as lead time, to determine what that level is:

Reorder point = lead time demand + safety stock

Lead time demand = lead time * average daily sales

Lead time = sum of number of days from date of order until date merchandise is received
in warehouse

Going back to the previous example, lead time is 15 days, and the average daily usage rate is 125
units. Here’s how the reorder point formula would work:

Lead time demand = 15 * 125 = 1875

Reorder point = 1875 + standard deviation

When you get down to XX units, it’s time to place an order to restock.

Many inventory management software options will automatically calculate your reorder point
and process purchase orders for you, helping to reduce the risk of stock-outs.

If you find your safety stock is too high, here are some ways to reduce it:

 Leverage automation: Automation does not only save time, but they can also keep your
data more accurate. As systems are connected and using the same data points, operations
management is more streamlined and efficient. For example, if you set your inventory
management software to automatically reorder when inventory hits a certain point, you don’t
need to wait until someone comes into the office to do it manually.

 Optimize your supply chain: Look for local suppliers, increase collaborations with your
existing suppliers, and conduct an audit on your existing supply chain to see where you have
the biggest opportunity.
 Reduce lead time: One easy way to reduce safety stock is to work to reduce lead times.
Ask your existing suppliers to see if there’s a way to expedite the process, and if not, shop
around to see if there’s someone else who can — without sacrificing quality.

 Create steady demand: Keep a close eye on demand spikes and dips — what caused
those fluctuations? From there, look at ways to address it. For example, you might consider
increasing your marketing and advertising budget during dips. Increase collaboration between
marketing and retail ops; make sure they’re each proactively communicating.

 Analyze and optimize: Is your safety stock being put to good use? You’ll never know
unless you take a look at it to see how it’s performing. You might find that you can reduce
safety stock for particular items or reduce lead time for others, for instance.

Applying the Safety Stock Formula to Your Business

While it’s crucial to find safety stock and apply it to your business, it’s only one inventory
metric among many. It gives a snapshot of your business through one perspective. The real value
is when you look at your KPIs holistically, identifying trends, issues, and even your wins.
What is a reorder point?

A reorder point is the inventory unit quantity on hand that triggers the purchase of a
predetermined amount of replenishment inventory. If the purchasing process and supplier
fulfillment work as planned, the reorder point should result in the replenishment inventory
arriving just as the last of the on-hand inventory is used up. The result is no interruption in
production and fulfillment activities, while minimizing the total amount of inventory on hand.

Second-

 what are the safety stock levels

Safety stock is the stock held by a company in excess of its requirement for the lead time.
Companies hold safety stock to guard against stock-out.

The difference is clear between them

Safety Stock = (Maximum Daily Usage - Average Daily Usage) × Lead Time

Lead time is the time which supplier takes in ordering the items

Example

ABC Ltd. is engaged in production of tires. Purchases rims from DEL Ltd. an external supplier.
DEL Ltd. takes 10 days in manufacturing and delivering an order. ABC's requires 10,000 units
of rims. Its ordering cost is $ 1,000 per order and its carrying costs are $ 3 per unit per year. The
maximum usage per day could be 50 per day. Calculate economic order quantity, reorder level
and safety stock.

Solution

EOQ = SQRT (2 × Annual Demand × Ordering Cost Per Unit / Carrying Cost Per Unit)

 
Maximum daily usage is 50 units and average daily usage is 27.4 (10,000 annual demand ÷ 365
days).

Safety Stock = (50-27.4) × 10 = 226 units.

Reorder Level = Safety Stock + Average Daily Usage × Lead Time

Reorder Level = 226 units + 27.4 units × 10 = 500 units.

Safety stock describes a level of extra stock that is maintained to mitigate risk of stockouts.

The reorder point  is the level of inventory which triggers action to replenish

inventory stock. ... It is normally calculated as the forecast usage during the replenishment lead
time plus safety stock.
Re-order Point :

Stock re-order point and safety stock are very vital concepts to avoid stock- outs. Re-order points
tell you when you want place replenishment order. In a simple example, a tea shop owner knows
his sugar stock is enough till tomorrow morning according to his daily consumption assumption.
He need new bag of sugar for tomorrow. If he calls the supplier today before2: PM, he will
supply one bag of sugar tomorrow morning8: AM. The re-order point is today2: PM for the shop
owner. Before calculating re-order point, you should understand following things:

a) Your daily / weekly / monthly consumption or usage

b) Lead time (the time required by the supplier to deliver the shipment at your premise.
Lead time will be varied according to your delivery terms, mode of transport and incoterms are
used in the contract. If it is based on Ex-works, please add transportation, clearance etc.. from the
order acknowledgement date till the shipment receipt date at your premise.)

c) Any anticipated special orders : You may expect special orders with special quantities in
specific frequencies.

Above information will help you to find out your re-order point. The basic understanding is ‘how
much quantity you need to meet your demand until you get your next replenishment order, that is
called re-order point’.

Re-order point calculation :

a)      Lead time (LT)

b)      Average daily consumption(ADC)

c)       Safety Stock (ST)

Re-order point = (LT x ADC) + ST

Safety Stock :

Safety stock is excessive stock to prevent stock-outs. Forecast errors, fluctuations in lead-time,
variability in customer demand or production are some of the factors create stock outs scenarios.
Safety stock determination is not intended to protect from stock outs, but it will help to eliminate
majority of stock outs.

The different elements effects the safety stock calculations are widely:
a)      Variability in lead-time

b)      Variability in demand

c)       Frequency of exceptional orders

 Safety tock can be and effective way to mitigate demand uncertainty, lead time vulnerability
while providing high service level to customers. When determining a plan for what level
customer service to be provided, then determine what level of safety stock and what degree of
stock out protection required to meet the determined service level.

In the above example at beginning, safety tock is the quantity required by the tea shop owner to
meet his customer demand from today2: PM till tomorrow8: AM for special unexpected
demand from customerstoday or and hour delay in sugar delivery tomorrow.

There is alternative method to mitigate variability other than safety stocks. One of them is
implementing order-expediting process. This practice is especially reliable for high cost
products. As an example, consider an expensive but relatively lightweight product. Holding cost
for the product will be high but an air transport of the material to expedite delivery rather than
sea freight will be more economic while comparing with the holding cost.

Another option to avoid safety stock is MTO (make-to-order) or FTO (finished-to-order)

production environment.

Safety stock calculation:

d)      Maximum Daily  consumption (MDC)

e)      Maximum Lead time (MLT)

f)       Average daily consumption(ADC)

g)      Average lead time (ALT)

Safety stock = (MDC x MLT) – (ADC x ALT)

Difference between re-order point and safety stock :

-          Re-order point tell you when you want to book your next replenishment order

-          Re-order point tell you the quantity required to meet customer demand until placing next
order
-          Safety stocks tells you how vulnerable is your forecast

-          The quantity required to meet customer demand without stock-outs

-          Face unexpected demand or short supply for a short period

Re-order point envisages when you want to place replenishment to meet certain customer
demands and safety stock level tells what extend you can meet uncertain customer demands.
 What is Reorder Point and Reorder Point Formula?

Every manufacturing business out there faces questions like:  

How many units of materials should I order from my supplier? 

 — When should I place my next supply order? and; 

 — When should I place a new manufacturing order? 

The answer to the first question is: it depends on the demand for your products. You project this
based on historical demand, and other factors like seasonal changes.  

The other two questions are answered by calculating your reorder point, or ROP.  

When you first started out in your manufacturing journey, you might have used your instincts
and common sense to estimate how much of each material to order.  

After all, you know your workshop better than anyone. Your supply orders came in and you
manufactured your product range problem-free. 

But intuition can only take you so far. As your business grows, and your orders get more
complex and numerous, it may start to get more difficult to accurately work out your raw
material requirements.  

Your workshop only has so much space, and excess amounts of material A and B are piling up,
while you keep running out of material Z. Not to mention the increased complexity of adding
more products, generating more SKUs.  

As soon as you apply a reorder point formula, you can take your order efficiency to a whole

new level. 

What is a Reorder Point? 

In short, a reorder point is a stock threshold that you don’t want to go below. Therefore the
ideal inventory reorder point allows for adequate time to make a new order before your stock
reaches this threshold.  

Reorder point is the metric that tells you two essential things:  

1. When it is the right time to order more materials from your supplier(s); and  
2. When it is the right time to manufacture more products by creating a manufacturing order
(MO).  
When the stock level for a material or finished product is about to reach the reorder point, a new
order should be placed immediately. 

This takes away any doubts or second-guessing. Your reorder point is there, clear as day, and
you just need to react when it is reached.  

Your stock will be regulated much better, with fewer interruptions like supply-chain breakdowns
or bottlenecks.  

Your inventory reorder point levels should cover every item in your inventory, including every
product variation’s product recipe. Sound complicated? This is part of a bill of
materials (BOM).  

You can link your inventory levels with each product’s BOM and track it with the right MRP
system.  

In fact, you will have more time on your hands to develop your business and focus on your
craft.  

More accurate materials requirements planning and more peace of mind. There’s no downside to
setting reliable reorder point levels and sticking to them. 

Reorder Point and Safety Stock 

The ideal reorder point ensures that your business does not dip below your safety stock levels. 

Your safety stock is your trump card in emergency situations. You shouldn’t have to keep
dipping into it.  

Think about it. If you miss your reorder point and use some safety stock, you need to order even
more materials to replace that safety stock once the supply order arrives. If you don’t, your safety
stock will eventually be worn down to nothing. Of course, extra orders costs extra money, so
should be avoided.  

Therefore, an ideal reorder point is typically a little higher than your safety stock level to factor
in delivery time. But how much higher does it need to be? It depends on the average lead time of
your reorder and the average demand during the lead time period.  

Why is this the case? 

Firstly, it's because when you place a new order, it does not arrive at your warehouse
immediately. It may take weeks or sometimes even months for the order to be processed and
shipped to your desired location. This delay in delivery is called "lead time”.  
Lead time refers to any delay from when an order is placed, to when an order is fulfilled.
Delivery lead time is just one example of lead time and is added to total lead time. 

Secondly, during lead time, you keep using the quantities still left in your warehouse for your
manufacturing and sales operations. Thus, a good reorder point also needs to take into
account how much quantity of the ordered item is actually left in your warehouse by the
time the reorder arrives. 

It is essential to take this lead time into account. Otherwise you run the risk of running out of
stock, before the reorder arrives.  

Your reorder point should make production in your business flow, not stop and start. 

Setting your reorder point too late defeats its purpose.   

Setting it too early means it sits around doing nothing for too long, increasing carrying costs and
harming your bottom line.  

You can get more information on how to reduce lead time to increase customer satisfaction
here.  

Reorder point calculation formula and safety stock calculation formula are in a way two sides of
the same coin. Safety stock describes the amount of inventory a business keeps in the warehouse
to protect against spikes in demand or shortages in supply.  

Your reorder point is the last line of defense before you resort to using safety stock, and
opening backorders. It keeps your safety stock in reserve for true emergencies only and makes
sure that each material you use is reordered in line with their usage.  

Therefore, you don’t have an overabundance or drought of stock. You get perfect balance in your
workshop, safe in the knowledge that you can deal with anything and still keep going.  

Read on to find out how to use a reorder point formula to set your reorder point.
How to Calculate Reorder Point? 

 Right, here is where we’ll put the theory into practice.  

PRO TIP: To make things easier it’s best to calculate your safety stock levels before doing
your reorder point formula. Here’s a guide to calculating your safety stock that we made earlier.  

After you’ve made your preparations, the actual ROP formula is pretty straightforward:  

Reorder Point = (Average Daily Usage x Average Lead Time in Days) + Safety Stock 

For example: 

If your manufacturing uses approximately 10 units of a raw material per day, it takes a week for
a reorder to arrive, and the safety stock level for that raw material is 50 units - your reorder point
calculation is: 

(10 x 7) + 50 = 120   

Your inventory reorder point is 120 units. If your stock for this item falls below that number,
then a new order should be placed. 

Here is an alternative ROP formula. It’s a shortcut to calculating your reorder point without

knowing your safety stock level. 

Reorder point = Maximum Daily Usage x Maximum Lead Time Days 

Estimate the maximum quantity of products or materials you need per day and multiply the
figure by the maximum expected lead time for purchasing or manufacturing activities. 

You are estimating the maximum usage so you get a more conservative estimate, with room for
error.  
It’s a good idea to then use the full formula when you get the chance to count up your safety
stock.  

Safety stock not part of your vocabulary? Although we are huge fans of lean manufacturing, it’s
a good idea to have some safety stock. Even just-in-time manufacturing needs just-in-case stock.
This negates the obvious downside of vulnerability to supply-chain disruptions for the JIT
approach. 

Once you think you’ve got calculating reorder points down, you can then begin learning more
about Shopify inventory management to optimize your business’s performance.   

Perfect Your Order Fulfillment with Your Accurate Reorder Point Policy 

When calculating reorder point levels, pay attention to changes in the underlying metrics. Daily
usage and lead time are not carved in stone. Like everything else, they are subject to change,
which means your reorder points are too.  

So although having an effective reorder point policy means you have freed up more time in your
week, you still need to stay on top things by making new reorder point calculations.  

Reorder point levels may increase as your business grows and they may fluctuate depending on
whether you are approaching high or low season.  

Thus, you should recalculate reorder point levels from time to time. A good tip to follow would
be to revisit these calculations in every 3-4 months. 
To sum up, using production and inventory management software allows your company to set
reorder points for each raw material and finished product variant under your roof.  

Everything is tracked automatically, so you can prevent cognitive overload as your business

grows. Increased success and sales demand do not have to become a burden.  

Katana flags the product and material variants that have dipped below their reorder
point automatically allowing you to easily identify the areas that require action. 

It’s basically an automatic alarm clock that tells you when you need to place an order so you
never miss a deadline, and get your customer wait times to a record low.   

If you wish to set or edit reorder point for an existing item, follow these simple steps: 

1. Navigate to the "Items" screen and select either "Products" or "Materials" tab from the
top of the table. 
2. Find and click on the product or material you wish to set a Reorder Point for. 
3. Find the Reorder Point column for this product or material (3rd column from the left).
 4. Enter the desired Reorder Point level for this product or material. 

This reorder point for your product or material can now be seen in the "Inventory" list. It is used
in calculating your "Missing/Excess" inventory level. 

https://katanamrp.com/blog/what-is-reorder-point-and-reorder-point-formula
 Reorder Point Formula - Know When to Reorder
You have a great new product on the shelves, and it’s selling fast. Every customer purchase
means more revenue, but also brings your inventory levels lower. A reorder point formula
enables you to reorder your stock at the right time.

What is reorder point? 

A reorder point is the unit quantity that triggers the purchase of a particular stock item.

How to calculate reorder point? 

 Calculate your lead time demand in days.

 Calculate your safety stock in days.

 Sum your lead time demand and your safety stock to determine your Reorder Point.

Of course you’ll reorder before it goes out of stock, but if you order too early, you’ll need to
spend more on storing these excess items. If you order too late, you’ll be facing disappointed
customers who’ll look to your competitors.

The question then is: When is the right time to order more stock?

To help you out, we’ve designed a reorder point calculator. It’ll let you know exactly when it’s
time to place an order for a new shipment of products.

 
Start by adding your data above

To understand the maths behind our reorder point calculator, let’s break the formula down.

You’ll need to know the lead time demand, because that’s how long you’ll have to wait before
new stock arrives - you’ll want to have enough to satisfy your customers while you wait!
And you’ll need to know your safety stock, because that’ll protect you against any unexpected
occurrences. Add your lead time demand to your safety stock… and voila! Once your stock
levels hit the total, it’s time to place a new order to replenish your supply.
Lead time demand - Shipping’s not instant!

New stock doesn’t arrive immediately. Even if your products are in stock, it’ll take your supplier
time to pack your order and even more time to ship it over to you. This waiting time is what’s
known as “lead time”.

So let’s put things into perspective. Imagine a business (let’s call it J Timewear) in the United
States sells watches manufactured in China. Assuming the supplier is always in stock and has a
warehouse full of watches ready to ship at a moment’s notice, it’ll probably take the supplier a
couple of days to pick and pack the watches. After that, the watches spend another five days in a
truck to the port, and from there, it takes about 30 days for a ship to travel from China to the
U.S.. Once the watches arrive, they spend another week in customs, and then another three days
traveling to J Timewear’s warehouse.
Calculating the lead time is easy: Just add everything up!

2 + 5 + 30 + 7 + 3 = 47 days of sales

Since it takes J Timewear 47 days to get a new shipment of watches, they’ll need to have enough
stock on hand to cover these 47 days of sales.

But knowing the lead time alone isn’t enough. You’ll also need to figure out the demand during
this period. Assuming J Timewear sells an average of 310 watches a month (310/31 = 10), they’d
be selling about 10 watches a day.

So the lead time demand for J Timewear is (47 x 10 = 470)... meaning J Timewear will need 470
watches to tide them over until their next shipment arrives, if nothing unexpected happens.

Safety Stock - When things go wrong

But sometimes, unexpected things happen. This can take the form of a sudden surge in demand
after some unexpected celebrity endorsement, and now your product is selling fast. Or perhaps
your supplier’s factory has experienced a breakdown and it’ll take a week for them to replace the
damaged component and get their machine up and running again.
And here’s where safety stock comes in. Safety stock is buffer stock you carry as a last defense
against unpredictable events that either deplete your stock (surge in demand), or unexpected
manufacturing time (your lead time skyrockets because the supply chain breaks down). Of
course you’d like to have enough safety stock to bring the likelihood of going out of stock down
to zero, but most of the time that’s not financially viable. After all, safety stock IS for a rainy day
that may never come! So how do we decide then on how much stock to keep on standby?

Here’s a simple formula that you can calculate based off your purchase and sales orders
history:

Let’s continue the story of J Timewear. On an average day, they sell 10 watches. But during
weekends, they can sell as many as 15. As for lead times, their usual lead time is 47 days, but
during typhoon season (yes, in China, they have typhoons) , it can go up to as high as 54 days.

(15 x 54) - (10 x 47) = 340

This means J Timewear needs to have about 340 units of safety stock on hand to guard against
the unexpected (especially during typhoon season). Therefore, with 340 units in safety stock,
selling about 80 watches on a good week (10 per day on weekdays and 15 on weekends), J
Timewear will have enough stock to last a little over 4 weeks.

Your safety stock can cater for all the variations in demand and lead time, providing you with
enough stock on hand to weather unexpected occurrences. Everyone and their entire family
wants your products? It’s time to sell your safety stock. Supplier needs an extra week because
he’s caught in the middle of a typhoon? It’s time to sell your safety stock.

If your product is seasonal, like school supplies, you’ll have to adjust your safety stock level to
cater to peak season demand. Once the peak season’s passed, it’s time to reduce your safety
stock levels again, as more safety stock = higher carrying costs. After all, people are a lot less
likely to be buying a new set of school stationery in the middle of summer holidays as opposed
to right before a new semester begins.

To complete the story of J Timewear, their reorder point formula calculation would be:

470 (Lead time demand) + 340 (safety stock) = 810

So once their stock hits 810 watches, J Timewear will need to place a new order with their
supplier. At 810 watches, they’ll have enough to last them as they wait for new stock to arrive
(470), while holding enough stock (340) as a buffer against an unexpected surge in demand or
supply chain problems.

Planning reorder points are a crucial part of inventory management. Setting your reorder point to
the optimum amount lets you cut down on excess spending, while ensuring you’ll have enough
stock for your customers even when things take an unexpected turn.

But how can you always ensure you’ll be able to place a fresh order whenever inventory levels
hit the reorder point? Keeping tabs on how much you’ve sold every day is easy when you’re
starting out with a single store. But as you start selling more and more, across different channels,
manually recording every sale becomes a pretty exhausting chore. And if you only tally up your
numbers on a weekly basis, missing the reordering point becomes a likely possibility.
Safety Stock and Reorder Point formula

Safety stock describes the amount of inventory a business keeps in the warehouse to protect
against spikes in demand or shortages in supply. From a perspective of a manufacturer, safety
stock principles can and should be applied for both raw materials and final products to ensure
availability of input for production, and goods for delivery. Most manufacturers employ some
kind of minimum inventory principles.

In a perfect world, your suppliers always deliver on time and your sales does not fluctuate

unexpectedly. So, your company would never run out of stock. In reality, your suppliers run into

delivery problems due to various one-off events, from time to time you fail to meet your weekly

manufacturing targets, and your sales is affected by seasonal effects and unexpected marketing

successes or failures. Also, sometimes unexpected spikes in demand are difficult to forecast.

Supply chain is full of surprises. Due to this uncertainty, having some stock in reserve helps you

keep your customers satisfied.

However, safety stock comes at a cost. Lean manufacturing principles guide you to eliminate

waste, and excessive stock is a waste as there are many costs to holding excess inventory.

Examples include renting additional warehouse space, paying salary to people handling the stock,

the risk of stock expiring or becoming outdated, and much more. Also, excess inventory means

your cash is tied up. Therefore, every manufacturer needs to find a good balance between having

enough safety stock to weather the storms, but not so much that it would break your bank.

How to calculate safety stock level?

The calculation is relatively easy in case you have reliable purchase and sales order history

available.
Safety Stock = (Maximum Daily Usage x Maximum Lead Time Days) — (Average Daily

Usage x Average Lead Time Days)

Let’s say there is a workshop in United States selling hand-crafted backpacks via eCommerce

shop to customers globally. The backpacks are produced mainly from leather sourced from

Mexico. One pack of leather procured includes material for one ready-made backpack. The

business model operates with the following characteristics.

 The production on average consumes 10 packs of leather per day to produce 10

backpacks, however, maximum production capacity allows to consume 14 packs of leather

per day

 It takes on average 14 days for leather packs to arrive from Mexico once the purchase

order is placed, however, historical data reveals that delays in supply occasionally push the

lead time up to 21 days

 It takes on average 5 days to produce one ready-made backpack, however, blockages in

production sometimes result in a 10-day production cycle

 On average 10 backpacks are sold per day, however, demand peaks occasionally push the

daily sales volume to 30 backpacks per day

Table below sums it up nicely.

Safety stock level for leather packs would be (14 x 21) — (10 x 14) = 154 units and for backpacks

(30 x 10) — (10 x 5) = 250 units. As the manufacturing process consumes on average 10 packs

per day then the workshop has a bit more than two weeks of raw material inventory available to

guard against the unexpected. As the workshop sells on average 10 backpacks per day then the

workshop has a bit less than one month of ready-made product inventory available to weather

unexpected occurrences.

When calculating safety stock levels pay attention to changes in underlying metrics. Maximum

daily usage and average daily usage are not figures carved in stone. They increase as your

business grows and they fluctuate depending on whether you are approaching high season or low

season. Thus, you should recalculate your safety stock levels from time to time. A good tip to

follow would be to revisit these calculations in every 3–4 months.

So now you know how much safety stock you need to keep in your warehouse readily available.

However, how to determine when should you place a new purchasing order for raw materials or

manufacturing order for a ready-made product? A good reorder point ensures that your business

typically does not dip below your safety stock levels and a good safety stock level means that

your quantities never hit zero in case the unexpected happens. Therefore, a reorder point is

typically a little higher than your safety stock level to factor in the lead time.

How to calculate reorder point?

The formula for calculating Reorder Point builds on the Safety Stock formula explained above

with the addition of factoring in the lead time for a new order.

Reorder Point = (Average Daily Usage x Average Lead Time Days) + Safety Stock
Continuing with the example above the reorder point for leather packs would be at (10 x 14) +

154 = 294 units and for backpacks at (10 x 5) + 250 = 300 units. Therefore, once the quantity in

the warehouse for leather packs or backpacks hits roughly 300 units, the company should place a

new purchasing or manufacturing order respectively.

As the average lead time is built into the reorder point the new shipment of leather packs from the

supplier or freshly manufactured backpacks from the workshop should arrive before the quantities

in warehouse dip below the safety stock levels. However, in case of production shortages or

delays in supply, the safety stock should ensure that the inventory levels will not fall to zero and

work in manufacturing can continue and shipments to customers can be sent undisturbed.