Formula for Reorder Point :

Safety Stock = (Maximum Daily Usage - Average Daily Usage) × Lead Time

Reorder point = Safety Stock + (Average Daily Usage × Lead Time)

Where,

Reorder Point - It is a threshold to maintain the right inventory level.

Average Daily Usage - Average number of products you sell each day.

Maximum Daily Usage - Maximum number of products you sell each day.

Safety Stock - Number of days worth of inventory you keep in case of emergency.

Lead Time - Number of days between issuing a purchase order and receiving the products.

Example :

A company "POLO Ltd.", on average, sell about 30 shirts a day. But, during weekends, POLO Ltd. likely to sell more lets say about 40 shirts. And while the lead time is usually 20 days, when supplier is not available at their desk it could go up to, say, 25 days. How much safety stock does "POLO Ltd" need ?

Solution :

Safety Stock = (Maximum Daily Usage - Average Daily Usage) × Lead Time

Safety Stock = (40 - 30) × 25

Safety Stock = 10 × 25

Safety Stock = 250

Reorder point = Safety Stock + (Average Daily Usage × Lead Time)

Reorder point = 250 + (30 × 25)

Reorder point = 250 + 750

Reorder point = 1000

Lead Time  Demand  Variability

Lead time is the time taken for the goods to arrive at your store or warehouse after they have been dispatched by your vendor.

Lead time (in days)

Average number of days in a month

 

Lead time (in months) = 0.33 months

Demand refers to the number of units that you sell to your customers in a given period of time.If you are calculating the safety stock for a year, then your average demand will be :

Summation of monthly sales (units)

 

Average Monthly Sales = Summation of monthly sales12

Average Monthly Sales = 15012

Average Monthly Sales = 12.5

Average Daily Sales = Summation of daily sales30.42

Average Daily Sales = 15030.42

Average Daily Sales = 4.93

Variability :

Variability is also known as standard deviation, captures the difference between the actual monthly demand and the average monthly demand.