Reorder point and economic order quantity
The reorder point is the stock level at which you must trigger a replenishment. It answers the question «when to order?», while the economic order quantity answers «how much to order?». Together, these two notions form the basis of sound inventory management: ordering neither too early nor too late, neither too much nor too little. Set correctly, they avoid 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 hits zero.
The economic order quantity: how much to order
The economic order quantity, formalised by the Wilson formula, seeks the best trade-off between two costs that move in opposite directions. Ordering often in small quantities multiplies ordering costs (processing, transport, receiving). Ordering rarely in large quantities inflates holding costs (capital tied up, storage, obsolescence). The economic order quantity is the point where the sum of these two costs is lowest. The idea to remember is not the formula itself but its intuition: there is an order size that minimises total cost, and ordering «by feel» almost always drifts away from it.
When to use them in an SME
These two references 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 recomputing 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.
The common mistake
The most widespread mistake is setting the reorder point without accounting for the real lead time or its variability: you then trigger too late and stockouts set in. The other trap concerns the economic order quantity: applying it blindly to items with very irregular demand or to perishables, when it assumes relatively stable demand. These tools are starting points to adjust to context, not absolute truths.
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Frequently asked questions
What is the reorder point?
It is the stock level at which you trigger a replenishment: demand during the lead time, plus the safety stock.
What is the economic order quantity (Wilson formula)?
It is the order size that minimises total cost, balancing ordering costs (ordering often) against holding costs (ordering a lot).
Do these formulas suit every item?
No. They assume relatively regular demand; for very irregular or perishable items they serve as a reference to adjust, not a strict rule.