Reorder point and economic order quantity

The reorder point is the stock level at which you trigger a replenishment order. It answers the question “when should I order?”, while the economic order quantity answers “how much should I order?” Together, these two concepts form the basis of sound inventory management: ordering neither too early nor too late, neither too much nor too little. Set correctly, they prevent both stockouts and needless accumulation.

The reorder point: when to replenish

The principle is simple: while you wait for a delivery, stock keeps falling at the pace of demand. The reorder point therefore equals the quantity needed to cover demand during the lead time, plus the safety stock that absorbs variability. In short: reorder point = demand during lead time + safety stock. As soon as stock drops to this threshold, you place an order, and it arrives before stock runs out.

The economic order quantity: how much to order

The economic order quantity seeks the best trade-off between two costs that move in opposite directions. Ordering often in small quantities multiplies ordering costs (processing, transport, and receiving). Ordering rarely in large quantities inflates holding costs (tied-up capital, storage, and obsolescence). The economic order quantity is the point where the sum of these two costs is lowest. It is given by the EOQ formula (Harris, 1913, also known as the Wilson formula): EOQ = √(2DS/H), where D is annual demand, S the fixed cost per order, and H the annual holding cost per unit. The formula rests on simplifying assumptions: steady demand, fixed costs, and no quantity discounts or minimum order quantities. Beyond the formula itself, remember its intuition: there is an order size that minimizes total cost, and ordering by gut feel almost always drifts away from it.

When to use them in an SME

These two parameters become useful as soon as an SME manages items with regular demand and recurring replenishment. They turn an intuitive purchasing decision into a simple, repeatable rule that teams apply without recalculating each time. This is the execution layer of the Two-Layer Model: once the service policy is decided upstream, the reorder point and the economic order quantity are the concrete settings that bring it to life day to day. Setting them item by item is part of our inventory optimization work.

The common mistake

The most widespread mistake is setting the reorder point without accounting for the real lead time or its variability: orders are then triggered too late and stockouts follow. The other trap concerns the economic order quantity: applying it blindly to items with very irregular demand or to perishables, when it assumes steady demand. These tools are starting points to adjust to your context, not absolute truths.

Check your replenishment rules

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