3.3Safety stock and reorder point
The essentials in 30 seconds
- Reorder point = demand × lead time + safety: reorder when stock only covers the lead time.
- Safety pays for variability: demand variability, lead-time variability, service level — 100% is absurd.
- Quantity fitted to reality: Wilson gives the order of magnitude, MOQ, pack sizes and free carriage decide.
Running mini-case — Nadia sets the threshold of her star ingredient
Nadia tracks an ingredient at 10 units per day with an average 15-day lead time from the port of Algiers, highly erratic. Lead-time coverage: 150. She adds 40 units of safety to hold 95% of cycles: threshold at 190, quantity of 320 for free carriage. When the supplier moves to 10 average days, she lowers threshold and safety instead of keeping the old setting.
Continued from cases 3.1-3.2 — Nadia moves from cost to live setting.
1. The reorder point
Most common method: trigger an order as soon as stock hits a threshold. During the lead time (see 0.4), you keep consuming; the threshold must therefore cover consumption during the lead time: 10 units/day × 15 days = 150 units — if everything were stable.
But nothing is: demand spikes, lead time slips. Hence safety stock, a reserve sized to absorb these hazards. Full formula: reorder point = (average demand × average lead time) + safety stock.
Safety stock is sized by demand variability, lead-time variability (an erratic supplier costs dearly — an argument for measuring OTIF) and target service level: 95 % costs far less than 99 %; targeting 100 % is absurd except for vital criticality.
2. How much to order: the economic quantity
The classic model is the economic order quantity (Wilson): a trade-off between ordering cost (pushes to order rarely and large) and carrying cost (pushes to order often and small). The optimal quantity grows with the square root of demand.
Its assumptions are simplistic (steady demand, fixed prices), but the lesson is robust: there is a robust order of magnitude — moving far from it costs dearly, deviating by 20-30 % costs little (flat curve around the optimum).
In practice, fit quantity to real constraints: MOQ, pack sizes (carton, pallet, container), free carriage, quantity discounts — the nearest "round" quantity to the economic optimum.
3. Reorder point vs periodic review
Alternative: periodic review — on a fixed date (each Monday, each month), order up to a target level. Benefits: grouped, predictable orders (one pass per supplier, optimised transport and free carriage), smoothed workload.
Price: slightly more safety stock (you must cover until the next date + lead time, a longer period). Reorder point for critical or expensive items (reactive), review for grouping whole ranges: most companies combine both.
The key: each item has an explicit, calculated rule, recalculated when demand, lead times or prices change. A replenishment system is never set once and for all: it is a living adjustment.
🔎 Concrete example — The threshold that prevents stockout
Item at 10/day, average 15-day lead time (high σ). Lead-time coverage = 150. Safety sized to cover spike + delay at 95 %: 40 units. Reorder point = 190. Wilson quantity ≈ 300, adjusted to 320 (2 pallets) for free carriage.
Reading: with no safety, the slightest delay causes stockout; with 40, 95 % of cycles pass.
Follow-up: quarterly recalculation: if the supplier moves from 15 to 10 average days, threshold and safety fall mechanically.
Section vocabulary
- Reorder point
- Threshold that triggers the order: (average demand × average lead time) + safety stock — covers consumption during the lead time.
Simple example: Nadia triggers at 190: 150 of coverage + 40 of safety for her star ingredient.
What it is not: ordering when the shelf is empty, by gut feeling.
Reflex: write each key item's threshold with its recalculation date.
- Safety stock
- Reserve to absorb demand and lead-time variability, based on the target service level; the price of irregularity.
Simple example: Nadia keeps 40 units to cover port peaks and delays at 95%.
What it is not: an identical cushion for all items regardless of variability.
Reflex: link each safety to a measured variability (peak, observed delay).
- Service level (inventory)
- Probability of avoiding a stockout over a cycle; targeting 95% costs far less than 99%.
Simple example: Nadia targets 95% on standard and reserves 99% for the material that stops the line.
What it is not: targeting 100% everywhere regardless of extra cost.
Reflex: choose the level by criticality: wide on vital, tight on accessory.
- Economic order quantity (Wilson)
- Quantity that minimises ordering + carrying; robust order of magnitude, to fit to MOQ, pack sizes and free carriage.
Simple example: Nadia adjusts Wilson ≈ 300 to 320, i.e. 2 pallets for free carriage.
What it is not: ordering the theoretical quantity that does not fit real pack sizes.
Reflex: take the nearest round quantity to the optimum that earns free carriage.
- Periodic replenishment
- Fixed-date order to restore a target level; groups orders at the price of slightly more safety stock.
Simple example: Nadia groups each Monday the whole range of one supplier instead of separate thresholds.
What it is not: putting everything on reorder point even when grouping would save.
Reflex: reserve periodic review for ranges to group, threshold for criticals.
In practice — Calculate the reorder point of a real item
- Pick an important item and measure: average demand (per day/week over 6-12 months) and actual observed lead time (not the promised lead time).
- Calculate lead-time coverage: average demand × average lead time — the core of the reorder point.
- Size safety: worst past gaps (spike, delay) and target service level (95 % vs 99 %).
- Set quantity (Wilson fitted to MOQ, pack size and free carriage) — record the rule and its next review date.
Ready-to-say script — getting the threshold and its review approved (1 min)
"For this ingredient at 10 per day and 15 days lead time, I set the threshold at 190 — 150 of coverage plus 40 of safety to hold 95% — and 320 as quantity for free carriage. We will recalculate each quarter, or as soon as the lead time changes."
Threshold + safety + quantity + review date: everything is explicit and verifiable.
Copy-paste template — threshold card per item
ITEM: _______________
AVERAGE DEMAND / DAY: _______________
OBSERVED AVERAGE LEAD TIME: _______________
SAFETY STOCK (variability + target level): _______________
REORDER POINT (demand x lead time + safety): _______________
QUANTITY (Wilson + MOQ + free carriage): _______________
NEXT REVIEW ON: _______________VSE / small budget
No statistics: average and worst gaps over 12 months in a spreadsheet, threshold tested against last year's stockouts.
Algeria SME
Variable port and road lead times: measure the actual observed lead time, not the promised one, and recalculate after each drift.
High-MOQ import
Fit quantity to the nearest full container or pallet to Wilson to earn free carriage.
Range to group
Switch to periodic review (each Monday) to group one supplier instead of isolated thresholds.
✓ Best practices
- Measure real lead time and its variability: an erratic supplier costs more safety than a slow but steady one.
- Choose service level by criticality: 99 % on vital, 90-95 % on accessory.
- Recalculate at every notable demand or lead-time change: a frozen threshold drifts fast.
✗ Common pitfalls
- Sizing safety by gut feel without looking at past gaps: you randomly over- or under-protect.
- Ignoring MOQ and free carriage: the unworkable theoretical quantity costs more than its adjustment.
- Leaving everything on reorder point: periodic review groups whole ranges better.
Key takeaways
- Reorder point = (average demand × average lead time) + safety stock: reorder when stock covers only the lead time.
- Safety pays for HAZARDS: demand variability, lead-time variability, service level — 100 % is economically absurd.
- Quantity arbitrates ordering/carrying (Wilson), fitted to MOQ, pack sizes, free carriage and discounts.
- Reorder point (reactive, criticals) and periodic review (grouped, ranges) combine — explicit, RECALCULATED rule.
48h Challenge — apply tomorrow
Like Nadia: compute the reorder point of 1 real item (average demand × real lead time + safety). Note threshold, quantity and review date on the template card.
- I can write the reorder-point formula without hesitation.
- I computed a threshold on real lead time and stated safety.
- I noted quantity and next review date.
Frequently asked questions
With no statistician or software, how do you size safety?
With a spreadsheet and 12 months of history: average and peak demand, average and worst actual lead times. Choose what you want to cover by criticality (vital = wide, standard = normal, accessory = minimal), convert to a figure and back-test: would it have avoided last year's stockouts? Adjust and recalculate quarterly.
Is the Wilson formula still useful?
Yes as an order of magnitude and as a lesson: the total-cost curve is flat around the optimum — being 20-30 % off costs little, being off by a factor of 3 costs dearly. And the square-root law holds: if demand quadruples, optimal quantity only doubles. Fitting to MOQ and pack sizes does the rest.
What does safety stock cover?