How to set reorder points that actually prevent stockouts

Most minimum levels are guesses that have been in the system so long they look like decisions. Someone typed 10 against every line during the original setup, and the store has been over-stocked on fast movers and short of slow ones ever since.

The idea underneath is simple: order when what is left will just cover you until the replacement lands.

The formula

Reorder point = (average usage per day × lead time in days) + safety stock

The first term is what you will consume while you wait. The second is your margin for the days you consume more than average, or the delivery arrives late. Get those two numbers honestly and the arithmetic is trivial.

Getting usage right

Use a period long enough to include your variation. Three months is usually the minimum; a year is better if your work is seasonal. Divide by working days, not calendar days, unless your store is genuinely open seven days.

One trap: exclude the abnormal. If a single shutdown consumed 400 seals in a week, that week will drag the average up and leave you carrying stock for an event that happens twice a year. Handle planned work by ordering for it, not by inflating the everyday minimum.

Getting lead time right

Lead time is not the supplier's quoted lead time. It is the time from "someone notices we are low" to "it is on the shelf and usable". That includes noticing, raising the order, approval, the supplier, goods in, and booking it in.

In most organisations the supplier is the smaller half. A three-day supplier behind a weekly purchasing meeting is a ten-day lead time, and that is the number that belongs in the formula.

Sizing safety stock

Statistically, safety stock is a function of demand variability and the service level you want. Practically, in a maintenance or engineering store, size it by consequence:

Worked examples

Nitrile gloves

Usage: 1,000 pairs over 60 working days, so about 17 a day. Lead time: 3 days from the supplier, but purchasing runs weekly — realistically 8 days. Lead-time usage is 17 × 8 = 136. They are cheap, running out is disruptive and visible, so take 100% safety stock.

Reorder point: 136 + 136 = 272, call it 280. Order a month's worth when you hit it.

A specific contactor

Usage: 6 in a year, so 0.024 a day. Lead time: 15 days. Lead-time usage is 0.36 — less than one.

The formula says hold nothing and order on demand. Then ask the question the formula cannot: what happens during those 15 days? If it is a spare for a machine that stops the line, the answer is to carry one regardless, and that is a risk decision rather than a stock calculation. Write the reason next to the item, or someone will "optimise" it away next year.

Review, or it rots

A reorder point set once is a reorder point that will be wrong within a year, because usage changes, suppliers change and lead times drift. Two habits keep them honest:

• Recalculate the top 20% by value or movement every quarter. They are most of your money and most of your stockouts.
• Whenever you do run out, ask which of the three inputs was wrong — usage, lead time, or safety stock. It is always one of them, and the answer improves the next hundred lines too.

This is also the argument for recording issues properly in the first place. Every number above comes from knowing what actually left the shelf. If your consumption data is a guess, your reorder points are a guess with extra steps.