Reorder Point

The reorder point formula is straightforward: ROP = (Average Daily Usage x Lead Time in Days) + Safety Stock. If you sell 10 units per day and your supplier lead time is 14 days, you need at least 140 units on hand when you reorder. Add safety stock of 50 units to buffer against variability, and your reorder point is 190 units. When inventory drops to 190, the system triggers a replenishment order. Getting reorder points right is a balancing act. Set them too high and you carry excess inventory, tying up cash and warehouse space. Set them too low and you risk stockouts, lost sales, and unhappy customers. The challenge is that both demand and lead time are variable. A product might average 10 units per day but spike to 30 during a promotion. A supplier might have a 14-day lead time on average but occasionally take 21 days. Reorder points need to account for this variability, which is where safety stock calculations come in. In an ERP system, reorder points can be set manually or calculated automatically based on historical demand patterns and supplier lead times. Automated reorder point calculation is preferable because it adapts to changing conditions. If demand for a product increases over several months, the system automatically raises the reorder point. If lead times from a supplier improve, the system lowers it. Most ERP systems can also generate purchase orders automatically when inventory hits the reorder point, subject to planner approval. This automation prevents the common scenario where a busy purchasing agent does not notice a stock level has dropped until it is too late.