Reading the reorder point: why the shelf went empty

1. Before you start

A reorder point is the stock level that should trigger your next order. Set it at the amount you expect to sell while you wait for the truck, plus a buffer for the days that go wrong. If you sell 10 units a day and the supplier takes 4 days, you burn 40 units before new stock lands — so a reorder point of 40 leaves you empty on an average day, and the buffer (the safety stock) is what keeps you selling when demand runs hot or the truck runs late.

Three honest statements before you start:

This is a Decide course. You read a situation, learn the idea, and make a call. You do not write or run any code.
The retailer below, Harbor & Vale, is a composite — an invented shop built from ordinary figures so the arithmetic is clean. No number is a claim about any real company.
This is not a certification. It shows, to you, that you can set and read a reorder point and defend the call.

You need only arithmetic. The hard part is judgment: reading why a shelf went empty.

2. The Situation

Harbor & Vale, a coastal outdoor-gear chain, just ran out of its best-selling 24 oz insulated flask for nine days — right through a sunny weekend — while a full pallet sat two days away at the supplier. The buyer had set the reorder point at 280 flasks, “seven days of sales,” and it felt safe. You have to decide what the reorder point should really be, and whether to place an order today.

The trap is that “seven days of sales” quietly assumes demand and the supplier both behave like their averages — and the whole reason the shelf went empty is that neither did.

3. What you’ll be able to do

After this course you will be able to:

Compute a reorder point as average daily demand times lead time, plus safety stock — and decide from on-hand stock whether to reorder now or hold.
Size a safety stock that covers both a demand spike and a late delivery, and say which of those two risks it is protecting against.
Read a stockout after the fact: split the shortfall into the part caused by demand variability and the part caused by lead-time slippage, and point the fix at the bigger culprit.

4. Prerequisites & time box

Prerequisites: arithmetic. Helpful but not required: the idea that inventory is sold down over time and refilled in batches (covered in section 6). No spreadsheet, no supply-chain background.

Time box: about 19 minutes of reading (measured), plus your own thinking time on the call. That is under the 25-minute cap for a concept course.

Difficulty: 3 / 8 — a new-manager decision: a couple of interacting factors and one real judgment call, where the obvious answer is often the trap.

Free-tier honesty: no signup, no software, no GPU.

5. The case & where the numbers come from

Harbor & Vale is a composite retailer: its demand and lead-time figures are built from ordinary numbers a single busy store would recognise, chosen for clean arithmetic and not drawn from or claimed about any real firm. The definitions — reorder point, lead time, safety stock — are standard and cited in section 11. Every figure below is an in-course assumption; every later number is computed from these.

Item	Figure
Average daily demand (the flask)	40 units/day
Peak daily demand (sunny weekends)	55 units/day
Average supplier lead time	7 days
Worst-case supplier lead time	10 days
Old reorder point (what was in place)	280 units
On-hand stock right now	300 units
During the last stockout: demand ran at	46 units/day
During the last stockout: the truck took	9 days

6. The Concepts

Reorder point

The reorder point is the on-hand level that should trigger a replenishment order. You want to place the order early enough that the new stock lands just as the shelf would have run dry, so the reorder point covers the stock you will sell during the lead time — the days between placing the order and receiving it — plus a buffer.

The formula is:

reorder point = (average daily demand × lead time) + safety stock

The first term, average daily demand times lead time, is the cycle stock — what you expect to sell while you wait. For Harbor & Vale at its averages: 40 units/day × 7 days = 280 units. That is exactly the “seven days of sales” the buyer used — and it is the reorder point with zero safety stock. On a perfectly average week it lands you at empty the moment the truck arrives. Any week that runs hotter than average, or any truck slower than average, and you stock out. The safety stock (next) is the whole difference between “empty on an average week” and “still selling on a bad one.”

(An interactive calculator sits here — enter your own demand, lead time, and on-hand stock, and it returns the cycle stock, the safety stock, the reorder point, and whether to order now.)

Safety stock

Safety stock is the buffer that covers the days demand runs above average or the supplier runs slower than average. A clean way to size it for a single item is the max method: stock for the worst plausible case and subtract the average case you already covered with cycle stock.

safety stock = (peak daily demand × worst-case lead time) − (average daily demand × average lead time)

For Harbor & Vale: (55 × 10) − (40 × 7) = 550 − 280 = 270 units. So the honest reorder point is cycle stock plus safety stock: 280 + 270 = 550 units — nearly double the “seven days of sales” the buyer trusted. Notice what the safety stock is doing: it stretches the buffer to cover a week where demand hits its 55-unit peak and the truck takes its full 10 days at the same time. That is the bad week that emptied the shelf, and 280 never had a chance against it.

Bigger safety stock means fewer stockouts but more cash tied up on the shelf; smaller safety stock frees cash but courts empty shelves. The max method sets the buffer at “survive the worst case you named” — a defensible starting point you then trim if carrying 550 units of one flask ties up too much cash.

Reading a stockout

When a shelf goes empty, “we ran out” is not a diagnosis. The reorder point rests on two averages — daily demand and lead time — and a stockout means at least one of them broke. Reading which one tells you where to spend the fix: chase the supplier, or hold more buffer for demand.

Split the shortfall. During the last stockout the old reorder point of 280 was supposed to last the lead time, but demand ran at 46 units/day and the truck took 9 days, so the shop actually needed 46 × 9 = 414 units — a shortfall of 414 − 280 = 134 units it did not have. Attribute that 134:

From demand running hot: the extra 6 units/day (46 − 40) over the 7 planned days = 6 × 7 = 42 units.
From the truck running late: the normal 40 units/day over the extra 2 days (9 − 7) = 40 × 2 = 80 units.
From both at once: the extra 6 units/day over the extra 2 days = 6 × 2 = 12 units.

That is 42 + 80 + 12 = 134 — the whole shortfall, accounted for. The read: lead-time slippage (80) did nearly twice the damage of the demand spike (42). The lesson is not only “hold more stock”; it is “the supplier’s late deliveries are the bigger risk here.” The max-method safety stock above covers it — its worst-case lead time of 10 days is exactly the term protecting against the truck — but the read also tells the buyer where a conversation with the supplier would pay off, and which number to watch next season.

7. Your Call

You have seen how the reorder point, safety stock, and the stockout read decide Harbor & Vale’s call. Now a different one lands on your desk.

Cedar & Pine, a home-and-garden retail chain, is setting the reorder point for its best-selling ceramic plant pot. It sells 30 pots/day on average, peaking at 42/day in spring; the supplier’s lead time averages 6 days and has stretched to 9. On-hand stock is 360 pots. The pot last stocked out while the reorder point was set at cycle stock only. Your job is to size the reorder point, read the last stockout, and then judge a new wrinkle: the supplier offers a faster lane that cuts lead time to 3 days (worst case 4) for a per-order fee — and you must say whether paying for speed is worth it.

How this differs from the taught case (the transfer): this is a different company in a different corner of retail (garden pots, not flasks), the figures are different so the arithmetic must be redone, there is an added constraint — a paid fast-lane option that was not in the taught case — and the decision type is different: you set a level and weigh an option, not just “order now or hold.” The core concept is the same: a reorder point is average demand over lead time plus a safety stock, and a stockout splits into demand and lead-time causes.

8. Self-check

Before you write the memo, make sure you can say each of these in one line:

What are the two terms of a reorder point, and what does each one cover?
Which single fact would most change the reorder point you set — a hotter demand peak, or a slower supplier?
After a stockout, how do you split the shortfall into a demand cause and a lead-time cause, and what does the bigger share tell you to do?

If any is fuzzy, reread section 6 — the reorder point, safety stock, and reading a stockout are the whole course.

9. Stretch

Push the decision further on your own:

Harbor & Vale’s cash is tight and 550 flasks on the shelf is a lot. If you accept a small chance of stocking out, what is the lowest safety stock that still covers a normal 55-unit peak week at the average 7-day lead time (rather than the worst-case 10)? What did you give up to free that cash?
The genuinely harder one: suppose demand and lead time are independent, and you want a reorder point that fails only about one replenishment cycle in twenty. Why does adding the two worst cases (the max method) overshoot that target, and which direction would a statistical safety stock move the number?
Write the one sentence you would say to a buyer who insists “seven days of sales has always been enough.”

10. Ship it — your decision memo

Write a one-page memo to Cedar & Pine’s buyer. State the call (set the reorder point at 378; order now, since on-hand 360 is already below it). Show the two-line arithmetic (cycle stock 30 × 6 = 180; safety stock (42 × 9) − (30 × 6) = 198; reorder point 378). Give the stockout read (late truck 60 pots vs demand spike 24 — the supplier is the bigger risk). Name what you rejected (cycle-stock-only reorder points; “the shelf looks full”) and why. Name the one thing that would change your mind (a faster, more reliable lead time — e.g. the paid fast lane — which drops the reorder point to 168). Keep it to a single page a buyer grasps in two minutes. This memo is your own argued claim — not a credential.

11. Sources

Harbor & Vale and Cedar & Pine, and every figure attached to them, are composite and illustrative — constructed for clean teaching arithmetic, not drawn from or claimed about any real company. The concept definitions used to reason about them are standard; references below.

Concept / claim	Source (publisher)	URL	Accessed
Reorder point = demand over lead time + safety stock	Wikipedia — Reorder point	https://en.wikipedia.org/wiki/Reorder_point	2026-07-19
Safety stock as a buffer against demand and supply variability	Wikipedia — Safety stock	https://en.wikipedia.org/wiki/Safety_stock	2026-07-19
Lead time = order-to-delivery interval	Wikipedia — Lead time	https://en.wikipedia.org/wiki/Lead_time	2026-07-19
Reorder point in inventory control	Wikipedia — Inventory control	https://en.wikipedia.org/wiki/Inventory_control	2026-07-19

Next up

Finished this call? Continue the Supply Chain & Procurement track:

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