EOQ tells you how much to order. The reorder point tells you when: the stock level at which you place the next order, so it arrives before you run out.
With steady demand it's simple. If you sell 20 units a day and the supplier takes 7 days to deliver, you'll sell 20 × 7 = 140 units while you wait. So you reorder when stock falls to 140, and the new delivery lands just as the shelf empties.
Real demand isn't steady, and deliveries are sometimes late, so you add safety stock: reorder point = daily demand × lead time + safety stock. With 50 units of safety stock, the shop above reorders at 140 + 50 = 190.
How much safety stock? A common formula is safety stock = z × σ × √L. σ (sigma) is the standard deviation of daily demand (how much it typically wobbles), L is the lead time in days, and z comes from the service level you want: about 1.28 for 90% of order cycles without a stockout, 1.65 for 95% and 2.33 for 99%. With σ = 10 a day, a 9-day lead time and a 95% target: 1.65 × 10 × √9 = 1.65 × 10 × 3 = 49.5, so about 50 units.
Notice what drives it: more uncertainty, longer lead times and higher service targets all need more safety stock, and going from 95% to 99% costs much more than going from 90% to 95%. Shortening the lead time is often the cheapest way to cut stock.
A café uses 25 bags of coffee a week, and the roaster takes 2 weeks to deliver. With no safety stock, at what stock level should it reorder?
| Reorder point | Daily demand × lead time + safety stock. |
|---|---|
| Lead-time demand | What you'll use while waiting. |
| Safety stock | z × σ × √L |
| σ (sigma) | Standard deviation of daily demand. |
| z | 1.28 → 90%, 1.65 → 95%, 2.33 → 99%. |