The inventory level at which a new purchase order should be placed to replenish stock before it runs out, accounting for lead time and demand.
The reorder point ensures you never run out of stock (stockout) while not ordering too early (overstocking). It factors in average daily sales, supplier lead time, and safety stock buffer. When inventory drops to the reorder point, it triggers a purchase order. Modern inventory systems like Laabam.One can automate reorder point calculations and purchase order generation.
A store sells 20 units/day of a product. Supplier lead time is 7 days. Safety stock is 50 units. Reorder Point = (20 × 7) + 50 = 190 units. When stock hits 190, order more.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Safety stock is extra inventory held as a buffer against unexpected demand spikes or supplier delays. It prevents stockouts when actual demand exceeds forecast or deliveries are late.
Review quarterly or whenever there's a significant change in demand patterns, lead times, or supplier reliability. Seasonal businesses should adjust before peak seasons.
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