Is the reorder point the same as minimum stock?

They are used similarly, but minimum stock is often a fixed number entered by hand. The reorder point is calculated from the demand forecast, lead time and safety stock and updates as demand changes.

Why are open orders taken into account?

Goods in transit will be on the shelf in a few days. Looking only at stock on hand leads to ordering twice for the same need.

What if stock has fallen below the reorder point?

Order immediately. If the stock position is also below the lead time demand, stock may run out before the goods arrive even if the order is placed today; consider a transfer or expedited supply.

What is the reorder point and how is it calculated?

The reorder point formula, why the stock position is more than stock on hand, how the order quantity is found and how stock-out risk is detected; with an example.

The reorder point (ROP) tells at which level stock should be reordered. The idea is simple: after the order is placed, there must be enough stock to sell until the goods arrive, plus safety stock against the unexpected.

Formula

lead time demand (LTD) = daily demand × lead time
reorder point          = LTD + safety stock

Safety stock has its own guide: How to calculate safety stock. The reorder point calculator gives both, along with the suggested order.

What the decision is based on: stock position

The reorder point is not compared with the stock on the shelf alone:

stock position = on hand + open purchase orders + transfers in transit
order needed   ⇔  stock position ≤ reorder point

If open orders are ignored, the same need is ordered again and again.

How much to order?

The reorder point answers “when”; “how much” needs a cycle quantity. Two common ways:

Economic order quantity (EOQ): the quantity that balances ordering cost and holding cost. See the EOQ guide.
Target cover: daily demand × target number of days (for example 30 days of need).

target level   = reorder point + cycle quantity
order quantity = target level − stock position

The quantity is raised to the minimum order quantity and rounded up to the case or lot size.

Example

Daily demand 10 units, lead time 14 days, safety stock 83.2 units. 150 units on hand, no open orders. Ordering cost 500, unit cost 40, annual holding rate 25%; minimum order 100 units, case size 50.

LTD            = 10 × 14                          = 140
reorder point  = 140 + 83.2                       = 223.2
stock position = 150 + 0 + 0                      = 150   → 150 ≤ 223.2: order needed
EOQ            = √(2 × 3,650 × 500 / (40 × 0.25)) = 604.2
target level   = 223.2 + 604.2                    = 827.4
raw quantity   = 827.4 − 150                      = 677.4
order          = ⌈677.4 / 50⌉ × 50                = 700 units

Stock-out risk

If the stock position is below the lead time demand (140 in the example), stock runs out before the goods arrive even if the order is placed today. An order alone is then not enough; a transfer from another warehouse or expedited supply is needed. In the example the position is 150, so there is no risk, but the margin is only 10 units.

In VidiStock

VidiStock calculates the reorder point from the forecast for every product and warehouse. Lead time demand is built from the daily rates of the forecast periods (for example next month’s forecast divided by that month’s number of days), so a seasonal increase shows up in the reorder point in advance. On the Order Suggestions screen every suggestion has a step-by-step breakdown of this calculation; products whose stock position is below the lead time demand are flagged separately as “stock-out risk”.