Reorder Point
Definition
The inventory level at which a new order should be placed to avoid running out before the replenishment arrives. It is based on demand during the supplier lead time plus any safety stock.
Formula
Reorder point = (Average daily usage × Lead time) + Safety stock
Related Terms in Purchasing & Inventory
Safety Stock
Extra inventory held as a buffer against uncertainty in demand or supplier lead time, reducing the risk of stockouts. Holding it costs money, so the level is a trade-off against service.
Lead Time
The time between placing an order with a supplier and receiving the goods. Longer or more variable lead times require higher safety stock to maintain the same service level.
Inventory Carrying Cost
The total cost of holding inventory over time, including storage, insurance, obsolescence, spoilage and the capital tied up. It is a key input to order-quantity and stocking decisions.
Stockout
Running out of an item so that demand cannot be met from stock. Stockouts cost lost sales and can damage customer trust, which is why businesses hold safety stock and track reorder points.
Stop memorising terms — let HelloBooks do the work
AI-assisted bookkeeping that handles invoicing, GST, reconciliations, and reports automatically. Free to start.