How to set a reorder point
Reordering when you notice the shelf is empty means you were already out for a week and did not know.
The short answer
A reorder point is average demand over the lead time, plus safety stock for the variation in both. The two common methods for sizing safety stock give very different answers, and the difference is what you are paying for certainty.
The formula
lead time demand = average daily usage x lead time in days
max method safety stock = (max daily usage x max lead time) - lead time demand
statistical safety stock = z x standard deviation of daily demand x sqrt(lead time)
reorder point = lead time demand + safety stock
z is the service level you choose. 1.645 covers 95% of outcomes and 2.33 covers 99%, and the jump between them is a business decision about the cost of a stockout rather than a statistical one.
Worked example
A product using 8 units a day on average with a standard deviation of 3, a 12 day lead time that has occasionally stretched to 18, and peak usage of 14 a day:
lead time demand = 8 x 12 = 96
max method: (14 x 18) - 96 = 252 - 96 = 156
reorder point = 96 + 156 = 252
statistical at 95%: 1.645 x 3 x sqrt(12) = 17.1 → 18
reorder point = 96 + 18 = 114
difference between the two methods = 138 units
252 or 114, from the same data. The max method protects against the worst day and the worst lead time happening together, which is possible and rare, and you pay to hold 138 extra units against it all year.
Which method to use where
The max method suits products where a stockout is catastrophic: a component that stops production, a consumable a service depends on. Paying to hold extra is cheaper than the failure.
The statistical method suits everything else, which is most things. It accepts that you will occasionally run out and prices that against the cost of holding stock all year.
Using the max method across an entire catalogue is a common and expensive mistake. It feels prudent and it ties up a large amount of cash against events that mostly do not happen.
Lead time variability matters more than demand variability
Because it sits inside the square root and it multiplies. A supplier whose lead time swings between 8 and 18 days causes more trouble than one whose demand swings by the same proportion.
This is worth knowing because the fix is different. Demand variability is managed with stock; lead time variability is often better managed by changing supplier or splitting orders between two.
Recalculate when the inputs move, not on a schedule
A reorder point set from last year's demand on a product that has grown 40% is now a point you hit after you have already run out.
The trigger to revisit is a change in average demand, a change in lead time, or a stockout. A stockout on a product with a correctly set reorder point should be rare enough that each one is worth investigating.
What this leaves out
- Assumes demand is roughly normally distributed, which is reasonable for steady products and wrong for seasonal or promotion-driven ones.
- Assumes a single supplier and a single location. Multiple sources or warehouses need a different treatment.
- Excludes minimum order quantities and price breaks, which frequently override the calculated point in practice.
This arithmetic is free to run in your browser — no signup, nothing held back.
Open the free calculatorCommon questions
- What service level should I use?
- Ninety to ninety five percent suits most ordinary products. Push higher only where a stockout costs a customer rather than a sale, because the stock required climbs steeply above 95% for very little additional coverage.
- How do I find the standard deviation of demand?
- From your own sales history, daily or weekly, over a period without unusual events. A spreadsheet does it in one function, and using real history beats any assumption you could make about variability.
- Should seasonal products use the same reorder point all year?
- No. Recalculate for each season using that season's demand rate, or the point will be far too low going into a peak and far too high coming out of one.
Spreadsheets that do this
The formulas above, already built and checked — so you fill in your numbers rather than the arithmetic.
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Last reviewed 22 August 2026