Reorder Point
The reorder point is the stock level that, once fallen below, triggers a new order. It is set so that the remaining stock covers consumption during the replenishment lead time without running into shortages.
The reorder point is the stock threshold stored in the item master that triggers a new order once stock falls below it. When an item’s available stock reaches this value, the system “signals” and generates a purchase-order proposal. The reorder point is not an arbitrary figure but is calculated so that the remaining quantity is enough to cover consumption throughout the entire replenishment lead time – that is, from placing the order to the arrival of the new goods.
The reorder point is therefore the central trigger variable of materials planning. It does not answer the question of how much to order, but when to order. The goal is to walk the narrow line between two errors: reordering too late leads to shortages and lost orders, while reordering too early ties up capital unnecessarily in excess stock. A correctly set reorder point keeps the business able to deliver while at the same time minimising average inventory.
At a glance
- Threshold whose breach triggers a new order
- Answers the question “when to order?”, not “how much to order?”
- Formula: daily consumption × replenishment lead time + safety stock
- Includes the safety stock, so it lies above the minimum stock level
- Stored per item in the ERP and the basis for automatic order proposals
How the reorder point is calculated
The reorder point consists of two components: the expected consumption during the replenishment lead time and a safety stock as a buffer. The common formula is: reorder point = average daily consumption × replenishment lead time in days + safety stock. The first term covers the expected normal consumption until delivery, the second absorbs fluctuations in demand and lead time. Without the safety stock, every small upward deviation would immediately cause a shortage.
A numerical example illustrates the principle: if an item is consumed at an average of 20 units per day, the replenishment lead time is 5 days and a safety stock of 50 units is applied, the reorder point works out to 20 × 5 + 50 = 150 units. If available stock drops to or below these 150 units, a new order is placed. Until the new delivery arrives, another 100 units are consumed as planned, so that ideally the safety stock of 50 units is still on hand when the goods are received.
The role of the replenishment lead time
The replenishment lead time – also called delivery time or procurement time – is the lever with the greatest impact on the reorder point. It covers not only the pure transport duration, but the entire span from placing the order, through order processing at the supplier and production, to putting the goods away in your own warehouse. The longer and less reliable this time, the higher the reorder point must be. If procurement is shortened, for example through a closer supplier, the reorder point can be lowered and thereby free up capital.
Reorder point, minimum stock and safety stock
In practice, the reorder point, the minimum stock level and the safety stock are often confused, even though they have clearly distinguishable functions. The safety stock (also called buffer or reserve stock) is the planned buffer that cushions fluctuations and is normally not touched. The minimum stock level is the lower limit that should not be undercut – it is frequently equated with the safety stock. The reorder point lies above it: it triggers the order early enough that stock does not sink down to the minimum or safety stock before the next goods receipt.
You can picture these figures as staggered thresholds. At the very top is the maximum stock level, which the warehouse reaches after a delivery. As stock falls through consumption, a new order is placed when the reorder point is reached. The safety stock marks the reserve that is only tapped when consumption or lead time deviates unfavourably from plan. Only when this reserve too is used up and no goods arrive does a shortage occur. The reorder point is therefore the active trigger variable, the safety stock the passive fallback.
Reorder point versus order point
In terms of content, the reorder point corresponds to what business economics calls the order point. The underlying method is called the reorder point system (or s-policy): as soon as stock reaches the defined point s, an order is placed. It contrasts with the fixed-interval (periodic review) method, in which stock is checked and replenished at fixed intervals – for example every Monday – regardless of the exact stock level. Reorder point and order point are thus largely synonymous; “reorder point” is the more common term in inventory management.
Why the reorder point matters
The reorder point is the decisive instrument against two opposing cost risks. If it is set too low, the remaining quantity does not last until the next delivery: the result is an inability to deliver, lost orders, contractual penalties or expensive rush orders. If it is set too high, ordering happens too early and, on the whole, in excess – the warehouse is permanently full, capital is tied up, and storage costs and the risk of write-downs rise. A cleanly calculated reorder point therefore has a direct impact on results.
Its real benefit unfolds in automation. Instead of a planner having to keep hundreds or thousands of items manually in view, the system monitors each item against its individual reorder point and flags only the items where action is genuinely needed. This reduces effort and human error and makes procurement plannable. The prerequisite, however, is reliable inventory management: if the book stock does not match the physical stock, even the best reorder point comes to nothing.
The reorder point in the ERP system
In inventory management and ERP systems, the reorder point is maintained as a field in the item master per item and often per warehouse. Inventory management checks with every issue posting whether the available stock reaches or falls below the threshold. If that is the case, the system automatically generates a purchase-order proposal or a replenishment alert in materials planning. The planner then only has to review, adjust and release the proposal instead of determining the requirement themselves. In this way the reorder point ties inventory management, purchasing and the supplier master into a seamless procurement process.
Modern systems go beyond the static value. They recalculate the reorder point dynamically by projecting the average consumption from the transaction data of the past weeks and taking seasonal patterns into account. For an item with sharply rising demand, the reorder point then rises automatically with it; for phase-out items it falls. This consumption-driven planning is more accurate than a value entered once and fixed, but it presupposes clean master and transaction data – one reason why data quality and inventory management form the basis of any functioning reorder-point logic.
Limits of the reorder point
The classic reorder point assumes reasonably even consumption. With sporadic, erratic demand – for example project business with large individual call-offs – it leads to shortages or excess stock, because a single large order does not reflect the average consumption. In such cases, requirements-driven planning (for example via bills of material and specific orders) is better suited than a rigid threshold. The reorder point is therefore above all the right tool for consumables with steady, plannable outflow.
Example
Example: online retailer for coffee accessories
An online retailer sells, among other things, coffee filters, which sell consistently at around 30 packs per day. From the receipt of the order to delivery, the supplier needs an average of 7 days. Because demand and lead time fluctuate slightly, the planner sets a safety stock of 60 packs. This results in a reorder point of 30 × 7 + 60 = 270 packs.
In the ERP, this value is stored in the item master. As soon as available stock falls to 270 packs through ongoing sales, the system automatically generates a purchase-order proposal with the stored supplier. During the 7 days until delivery, roughly 210 packs are sold as planned, so that around the safety stock of 60 packs is still in the warehouse when the goods are received. When a promotion permanently increases demand, consumption-driven planning raises the reorder point automatically – the retailer stays able to deliver without having to update the threshold manually.
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