Both mistakes cost the same
Order too little and you fail to sell, and hand the customer to a competitor. Order too much and you freeze cash in goods that sit for six months. Companies fear the first and therefore commit the second regularly: a buyer who was criticised for a stockout will order with a margin next time.
The second mistake is quieter, because it does not generate phone calls. Stock on a shelf looks like an asset, when in fact it is money already spent and not yet recovered. In most small distributors somewhere between ten and thirty per cent of the warehouse is stock that arrived there without a calculation.
Both are removed by two numbers: the reorder point and safety stock.
Reorder point: three numbers
The reorder point is the stock level at which a new order is placed. Not when it runs out — earlier, allowing for the time supply takes.
Reorder point = daily usage × lead time + safety stock
Three numbers, and you already have all three.
Daily usage. How many units go out per day, taken over the last three months rather than last week. A week is far too sensitive to a single large order.
Lead time. Days from placing the order to the goods being ready to sell. To sell, not to arrive: receiving, checking and putting away take time too, and that time is routinely forgotten.
Safety stock. A buffer for when demand spikes or the supplier is late. More on that below.
Safety stock: how much exactly
Safety stock protects against two different risks, and they are worth calculating separately.
Demand risk. Sales are uneven. If the average is 10 units a day but busy days reach 18, that difference has to be covered by something.
Supplier risk. They promised 14 days and it is sometimes 20. That delay costs exactly as much stock as you sell in six days.
For most small companies a simple approach is sufficient: take the maximum daily usage over the last three months, subtract the average, multiply by lead time. Add sales over the supplier's typical delay.
More precise statistical methods exist, but they need clean data going back a year or more. If you do not have that yet, the simple calculation delivers ninety per cent of the benefit.
The main thing about safety stock: not every item needs it. Holding a buffer on a line that sells twice a year is pointless — there it is cheaper to occasionally lose the sale.
A worked example
An item sells at an average of 12 units a day, up to 20 on peak days. The supplier takes 14 days and is sometimes 4 days late.
- Safety stock for demand: (20 − 12) × 14 = 112 units
- Safety stock for delay: 12 × 4 = 48 units
- Total safety stock: 160 units
- Reorder point: 12 × 14 + 160 = 328 units
So as soon as stock falls to 328, order. Not when it runs out, not when it "looks low" — at a specific number.
Notice how large safety stock is relative to the base. That is a direct consequence of an unreliable supplier: four days of lateness costs 48 units of permanently frozen stock. Sometimes changing supplier is cheaper than carrying a buffer for their poor timekeeping — and this calculation is what gives you the argument for that conversation.
Not every item deserves the same attention
Calculating a reorder point for each of two thousand lines is wasted effort. What works is splitting by contribution to turnover.
| Class | Share of lines | Share of turnover | What to do |
|---|---|---|---|
| A | ~20 % | ~80 % | Calculate precisely, review monthly |
| B | ~30 % | ~15 % | Simplified calculation, quarterly review |
| C | ~50 % | ~5 % | Order on demand, carry no safety stock |
Your proportions will differ, but the principle holds: twenty per cent of lines drive most of the turnover and deserve attention, and half the range is not worth calculating at all.
What the system calculates
The formula is simple, and that is the trap: nobody is going to recalculate it by hand for a hundred lines every month. Within two months the spreadsheet is stale and everyone reverts to instinct.
In Business Central the reorder point and safety stock live on the stockkeeping unit — that is, per item and per location. This matters, because a central warehouse and a regional depot have different usage and different lead times, and one shared figure for both is a guess dressed as a calculation.
Planning then shows what to order and in what quantity, allowing for orders already placed with suppliers and stock already reserved. That removes the main weakness of the manual approach: the calculation stops being an occasional exercise and starts running daily. What happens to goods after they arrive is covered in warehouse logistics, and how their cost is calculated in inventory costing methods.
Frequently asked questions
What period should daily usage be based on?
Three months for stable demand. For seasonal goods an annual average is meaningless — use the equivalent period last year adjusted for growth. A single week should never be used: one large order distorts the picture entirely.
What if the supplier is consistently late?
Calculate what safety stock for their delays actually costs and take that figure into the negotiation. It frequently turns out the buffer carried for an unreliable supplier is worth more than the price difference with a dependable one.
Does every item need safety stock?
No. For lines with infrequent and unpredictable demand, holding a buffer costs more than occasionally losing the sale. Safety stock is worth it for class A items and some of class B; the rest can be ordered on demand.
How often should the reorder point be reviewed?
Monthly for key lines, since both demand and lead times move. Quarterly for the rest. Always recalculate after changing supplier or when seasonality shifts noticeably.
Can this be done in a spreadsheet?
Calculating it once, yes — and that is a sensible way to start. The problem is repetition: nobody recalculates a hundred lines by hand every month, so within two or three months the numbers are stale and get ignored.