How much safety stock should I hold?

The statistical method sets safety stock from your demand variability and target service level: SS = Z × σd × √L, where Z is the service-level factor (1.65 for 95%, 2.33 for 99%), σd is the standard deviation of demand per period, and L is the lead time in those periods. For example, demand averaging 100/day with a standard deviation of 20, a 9-day lead time, and a 95% service level gives about 99 units of safety stock.

What is the reorder point?

The reorder point is the on-hand quantity that should trigger a new order: ROP = average demand during the lead time + safety stock. With 100 units/day of demand, a 9-day lead time, and 99 units of safety stock, the reorder point is (100 × 9) + 99 = about 999 units.

How is EOQ calculated?

Economic order quantity is EOQ = √(2DS / H), where D is annual demand, S is the fixed cost to place one order, and H is the cost to hold one unit for a year. For D = 12,000 units, S = $50, and H = $3, EOQ is about 632 units — roughly 19 orders a year. At the EOQ, annual ordering cost and annual holding cost are equal.

What service level should I use for safety stock?

Higher service levels cut stockouts but cost more to hold. Moving from 95% to 99% raises the Z factor from 1.65 to 2.33, so in the example above safety stock jumps from about 99 units to about 140 — a 40% increase in buffer for the last few points of availability. Set the level by how costly a stockout is for that item.

Inventory Planning: Safety Stock, Reorder Point & EOQ

Three numbers keep stock available without tying up cash you don’t need to: safety stock (the buffer against variability), the reorder point (when to place the order), and EOQ (how much to order). Get them right and you stop both stockouts and overstock. Here are the formulas, worked examples, and how the three fit together.

Safety stock — the buffer

Safety stock absorbs the swings in demand and lead time so a bad week doesn’t become a stockout. The statistical formula is SS = Z × σ_d × √L: the service-level factor Z (1.65 for 95%, 2.33 for 99%), the standard deviation of demand σ_d, and the square root of the lead time L. Say demand averages 100 units a day with a standard deviation of 20, lead time is 9 days, and you want 95% service: SS = 1.65 × 20 × √9 = about 99 units. For both methods, the Z-table, and the lead-time trap, see how to calculate safety stock.

Reorder point — when to order

The reorder point is the on-hand level that should trigger the next purchase order: ROP = (average demand × lead time) + safety stock. Using the same numbers, that’s (100 × 9) + 99 = about 999 units. Hit 999 on the shelf and you order — the 900 covers normal demand across the 9-day lead, and the 99 covers the bad stretch. More detail in how to calculate the reorder point.

EOQ — how much to order

Economic order quantity is the order size that minimizes ordering and holding cost together: EOQ = √(2DS / H), where D is annual demand, S is the fixed cost to place one order, and H is the cost to hold one unit for a year. For D = 12,000, S = $50, and H = $3: EOQ = √(2 × 12,000 × 50 / 3) = about 632 units, or roughly 19 orders a year. More in economic order quantity explained.

At the EOQ, the money you spend placing orders and the money you spend holding stock are equal — in the example, about $949 each. That balance point is the whole idea.

How the three fit together

They answer different questions and work as a set. EOQ sets how much you buy each time. Safety stock sets the cushion that rides underneath. The reorder point sets when you buy — and it’s built from the safety stock plus the demand you’ll see during the lead time. Change your service level and the whole chain moves: going from 95% to 99% pushes Z from 1.65 to 2.33, so the buffer in our example climbs from ~99 to ~140 units, and the reorder point rises with it. Higher availability, more cash on the shelf — set the level by how much a stockout actually costs you.