Reorder Point
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Keeping too little inventory means missed orders; keeping too much means paying for storage on stock that might go obsolete. The reorder point tells you exactly when to place a new order to avoid both.
What is the reorder point formula?
Lead time is how long it takes new inventory to arrive once you order it. Safety stock is extra inventory you keep on hand as a buffer, in case demand spikes or a shipment is delayed.
Worked example: calculating the reorder point
Say you sell 25 units per week, and it takes 4 weeks on average for new inventory to arrive once you order it:
If you ordered right when you hit 100 units, you'd run out completely the moment the new inventory arrived — zero margin for error. That's risky, so you keep a safety stock instead: say, 50 extra units.
Instead of waiting until you're down to 100 units, you place your next order at 150. By the time the new inventory arrives four weeks later, you've used the 100 units you expected to and still have the 50-unit safety stock in reserve.
The reorder point covers expected usage during lead time, plus a cushion. Without safety stock, any delay or demand spike leaves you with nothing to sell; the reorder point builds that buffer in before it becomes a problem.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.