Reorder point formula: how to calculate ROP with an example

The reorder point is the stock level that tells you to place the next purchase order. Set it too low and you run out while the order is still on its way; set it too high and cash sits on the shelf. This guide explains the reorder point formula, works through an example with hypothetical numbers and shows how to build it in a spreadsheet.

The reorder point formula

Two inputs drive the first term. Average daily demand is the number of units you normally use or sell per day. Lead time is the number of days between deciding to order and having the goods available to use, not just the transit time. It includes the time to raise and approve the order, the supplier’s production or picking time, transport, customs clearance and receiving.

Safety stock is the buffer for the cycles when demand runs above average or the delivery arrives late. If you hold none, the reorder point equals expected demand during lead time, and you will run short whenever reality comes in above the average.

Worked example (hypothetical numbers)

A small distributor sells one item at an average of 25 units a day. Ordering, supplier production and shipping add up to 20 days. The planner holds 120 units of safety stock.

1. Demand during lead time: 25 × 20 = 500 units.
2. Reorder point: 500 + 120 = 620 units.

Each time the inventory position for the item falls to 620 units or fewer, the planner places a new order. On an average cycle, about 120 units remain when the delivery lands.

Now suppose the supplier moves production and the lead time grows to 28 days. Demand during lead time becomes 25 × 28 = 700 units, and the reorder point rises to 820. Lead time changes move the reorder point directly, which is why it should be reviewed whenever you change supplier, route or Incoterm.

Compare it with inventory position, not stock on hand

The most common mistake is comparing the reorder point with what is physically on the shelf. Use the inventory position instead:

If an order is already on the way, the stock on hand will keep falling below the reorder point until it arrives. Comparing against on-hand stock alone would trigger a second, unnecessary order. Most inventory and ERP systems can report inventory position; in a spreadsheet, add a column for open orders.

Where the safety stock figure comes from

There are several ways to set safety stock, from a fixed number of days of cover to a statistical formula based on demand and lead-time variability. Our guide to the safety stock formula compares three methods. For a quick estimate, the statistical version with variable lead time is:

Here d is average daily demand, σd is the standard deviation of daily demand, L is average lead time, σL is the standard deviation of lead time and z is the factor for the service level you want. The reorder point calculator can calculate this for you.

Building the reorder point in Excel or Google Sheets

A simple layout uses one row per item:

Column	Content	Example formula (row 2)
A	Item code	(text)
B	Average daily demand	(your data)
C	Lead time in days	(your data)
D	Safety stock	(your data or a formula)
E	Demand during lead time	=B2*C2
F	Reorder point	=ROUNDUP(E2+D2,0)
G	Inventory position	=on hand + on order − committed
H	Reorder now?	=IF(G2<=F2,"Order","OK")

To calculate safety stock in the sheet, add columns for the two standard deviations and use =NORM.S.INV(0.95)*SQRT(C2*σd^2+B2^2*σL^2), replacing the Greek letters with the cell references that hold those values. NORM.S.INV returns the z-factor for the service level you enter, so 0.95 gives about 1.645.

Measuring the inputs well

Average daily demand. Use a period long enough to smooth out noise but short enough to reflect current sales, and exclude one-off orders you do not expect to repeat. If demand is seasonal, calculate separate reorder points for high and low seasons.

Lead time. Measure it from your own purchase order and receipt dates rather than the supplier's quoted figure. If you only record the ship date, add the internal days for approval and receiving.

Units. Keep demand and lead time in the same time unit. If you measure demand per week, express lead time in weeks.

When the basic reorder point is not enough

The formula assumes you check stock continuously and can order at any time. If you review stock only on fixed days, for example every Monday, you also need to cover the time until the next review. A common approach in periodic review systems is an order-up-to level that covers demand over the review period plus the lead time, plus safety stock.

The formula also assumes demand is reasonably steady. Items that sell rarely or in large, irregular lots are better handled with a minimum and maximum set by judgement, or with forecasting methods designed for intermittent demand.

Finally, the reorder point decides when to order, not how much. To size the order itself, use the EOQ calculator and then check the result against supplier minimums with our guide to EOQ vs MOQ.

A short checklist

• Measure lead time from order to availability, using your own records.
• Compare the reorder point with inventory position, including open orders.
• Recalculate after any change in supplier, route, demand pattern or service-level target.
• Round the reorder point up to a whole unit, or to a pack size if you buy in packs.
• Review items with erratic demand by hand rather than relying on the formula.

Additional sources

• Reorder point – Wikipedia
• Safety stock – Wikipedia
• Normal distribution table – NIST/SEMATECH e-Handbook of Statistical Methods

Related guides: ABC/XYZ classification, how to find and clear dead stock, inventory optimization consulting, and all free supply chain calculators.