Formulas
- Safety stock = z × σ × √lead time
- Reorder point = daily use × lead time + safety stock
σ is the standard deviation of daily use, and z depends on the service level: 1.28 for 90%, 1.64 for 95%, 1.96 for 97.5% and 2.33 for 99%.
Example
You use 40 units a day, the supplier takes 7 days and daily use varies by 8 units. For a 95% service level, the safety stock is about 35 units and the reorder point is 315 units: place a new order when stock falls to 315.
To decide how much to order each time, use the economic order quantity calculator.
Frequently asked questions
What does a 95% service level mean?
In about 95 of every 100 order cycles, the stock will not run out before the new delivery arrives.
What if I do not know the standard deviation?
Leave it at 0 for no safety stock, or estimate it from a few weeks of daily sales with the standard deviation calculator.
Should the lead time include shipping and approval?
Yes: count from the moment you decide to order until the goods are ready to sell.
See also
Results are estimates for information only and are not financial, legal or medical advice. Rates, taxes and fees vary — confirm with a professional or your lender.