Use demand and lead time in matching units
Average daily demand multiplied by lead time in days estimates stock needed while you wait for replenishment. Add safety stock to allow for uncertainty. Use consistent units and define whether lead time includes processing, shipping and receiving. A supplier's dispatch date is not necessarily the date stock becomes usable.
Worked example: a regularly used component
Imagine demand averaging 4 units per day and replenishment taking 7 days. Expected lead-time demand is 28 units. If the business chooses an illustrative safety stock of 12 units, the reorder point is 40. Those 12 units are an assumption for the example, not a universal recommendation or a calculated service-level guarantee.
Look at inventory position, not only shelf stock
Inventory position considers available stock, incoming orders and committed or backordered quantities. Reordering solely from a shelf count can create duplicate orders while stock is already on the way. Keep purchase-order status and reservations current, and confirm that damaged or expired stock is not counted as available.
- Recent usage and unusual demand spikes.
- Observed supplier lead times and variation.
- Available stock and committed quantities.
- Open orders and expected receipt dates.
- Storage, cash and expiry constraints.
Handle seasonal and irregular demand differently
An annual average may be misleading for seasonal products. Plan around the period you are entering and distinguish recurring demand from a one-off large order. For expensive slow-moving items, a manual purchase decision may be safer than a simple threshold. Safety stock has a cost and should not grow indefinitely because every past shortage feels urgent.
Review after real deliveries
Compare expected and actual demand during lead time. Investigate stockouts and excess stock separately; they may have different causes. Update assumptions when suppliers or customer behaviour change. Reorder quantities need their own decision about pack sizes, minimum orders and cash, so do not confuse reaching the reorder point with approval for an unlimited purchase.