Predetermining a reorder point is based upon the order lead-time, the usage rate, and the amount of safety stock (i.e., extra stock kept on hand, just in case). The reorder point is calculated using the following formula:

Reorder Point = (Order Lead Time x Usage Rate) + Safety Stock

For example: You are operating a department store and an order of T-shirts takes 5 days. You sell 10 T-shirts a day. You like to have five extra shirts in stock at all times. The reorder point is (5 x 10) + 5.  The reorder point is 55. You want to place a new order when you have 55 T-shirts in stock.

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You manage a small town grocery store in rural Alberta. A delivery from your supplier takes seven days. You sell one bottle of ketchup a day. You like to have four bottles of ketchup in stock at all times. What is the reorder point?

Reorder Point = (Order Lead Time x Usage Rate) + Safety Stock

Order Lead Time = 7 days
Usage Rate = 1 bottle / day
Safety Stock = 4 bottles of ketchup

Reorder Point = (7 x 1) + 4
Reorder Point = 7 + 4
Reorder Point = 11

Your reorder point is 11. You want to place a new order when you have 11 bottles of ketchup in stock.