Guide · Anyone buying stock to keep on the shelf

How to set reorder points and minimums (without a statistics degree)

A simple, practical way to set minimums and reorder points from your own usage and lead times, so you stop running out without overbuying.

Run out of a part and a job stops. Overbuy and cash sits on the shelf. A reorder point is the stock level at which you order more, set so that the new delivery arrives before you run out. Here is how to set one from numbers you already have.

The basic formula

Reorder point = average daily usage × lead time in days + safety stock

• Average daily usage: how many you use on a normal working day. Take the last three to six months of use and divide by the working days.
• Lead time: working days from placing an order to having it on the shelf, including your own time to approve and receive it.
• Safety stock: a cushion for the days usage is higher or delivery is slower than normal.

A worked example

You use about 4 end mills a working day. Your supplier takes 5 working days, and it takes you a day to raise and approve the order, so the lead time is 6 days. Usage during the lead time is 4 × 6 = 24. Add a safety stock of 8 (two extra days of use) and the reorder point is 32. When you get down to 32, order.

Setting safety stock, simply

A practical rule: start with a few extra days of usage, more for parts that stop work if they run out and for suppliers who are often late, less for items you can buy locally the same day. Then adjust: if you still run out, add a day; if stock never drops below the safety level, take a day away.

How much to order

The reorder point says when; you still need how much. A common, simple choice is enough to cover a fixed period, such as two to four weeks of usage, rounded to the pack size or price break. Order more often in smaller amounts for expensive items, less often in bigger amounts for cheap ones.

Review them twice a year

Usage and lead times change. Twice a year, recalculate for your top items, and any time a supplier changes lead time or a job changes demand. A reorder point that was right last year is a guess this year.

The checklist

• Average daily usage from the last three to six months.
• Lead time including your own approval and receiving time.
• Safety stock set by how critical the item is and how reliable the supplier is.
• Reorder quantity rounded to pack sizes and price breaks.
• Reorder points reviewed twice a year and after any big change.