Safety stock and reorder points without the jargon
Two practical methods, when to use each, and how to keep buffers from tying up too much cash.
Every item has two questions: when to reorder and how much buffer to keep. The reorder point answers the first; safety stock is part of the answer.
Reorder point
Reorder point = average daily demand × average lead time + safety stock
If you sell 120 units a day and the supplier takes 14 days, you need 1,680 units to cover the lead time — plus your buffer.
Method 1: maximum minus average
Safety stock = (max daily demand × max lead time) − (average daily demand × average lead time)
Simple and conservative. Use it when you only know typical and worst-case values. It does not target a specific service level and can produce large buffers.
Method 2: statistical
Safety stock = Z × √(LT × σd² + d² × σLT²)
Here σd is the standard deviation of daily demand, σLT the standard deviation of lead time, and Z depends on the service level you want (for example 1.645 for 95%). Use it when you have enough history to measure variability.
Keep buffers in proportion
Safety stock costs money. Apply higher service levels to critical and high-margin items, and lower ones to slow, low-value items — an ABC analysis helps you decide where.
Review the numbers regularly: demand and supplier performance change, and so should your buffers.