A reorder point tells you when to act; an order quantity tells you how much to buy. Keep them separate, and include open purchase orders so you do not order the same replenishment twice.
Practical frameworks are editorial recommendations. All worked examples are hypothetical, not client results. Confirm transaction-specific legal, tax and safety requirements with a qualified professional.
1. Measure the complete replenishment lead time
Measure from purchase-order release until stock is received and usable, including production, transit, clearance and inspection. Use a consistent daily or weekly unit for both demand and lead time.
- Record actual lead times and unusually late receipts, not only the supplier’s quoted transit time.
- Segment items by demand variability and stockout impact. Intermittent demand, perishables and new products need separate policies.
2. Calculate the reorder trigger
MIT’s inventory teaching distinguishes continuous review from periodic review and relates the reorder level to lead-time demand and safety stock. For a basic continuous-review policy, use expected lead-time demand plus a justified buffer.
Source: MIT OpenCourseWare: Inventory management, slides 21–25
Worked example
Illustrative example: demand averages 20 units per day and usable replenishment takes 15 days. Expected lead-time demand is 300 units. With an assumed 100-unit buffer, the reorder point is 400 units; the buffer is not a calculated service-level guarantee.
3. Trigger on inventory position, not shelf stock alone
Inventory position equals usable on-hand stock plus outstanding replenishment minus backorders. Keep reserved-demand treatment consistent so commitments are not deducted twice. Do not count quarantined or obsolete stock as usable.
Worked example
Illustrative example: 250 usable units + 200 units already ordered − 30 backordered units = an inventory position of 420. That is above the 400-unit trigger. A late inbound order still needs an exception review; this aggregate number does not guarantee timely availability.
4. Choose a policy and review its failures
If you check stock only weekly, protect against demand during both lead time and the review interval; do not reuse a continuous-review threshold unchanged. Set order quantities separately using lot size, capacity and carrying-cost constraints.
- Review stockouts, fill rate, late receipts and ageing stock together. More inventory can hide poor lead-time data without fixing it.
- Re-estimate the buffer when demand or lead-time variability changes. Validate service targets and model assumptions before using statistical safety-stock formulas.