Inventory lead times: reorder points, lots and cash

A longer supplier lead time usually moves the reorder signal earlier. Calculate expected demand during lead time plus a stated safety buffer, then compare that threshold with a defined stock position. Keep the purchase quantity and supplier payment schedule separate: a 1,400-unit reorder point does not mean ordering 1,400 units.

Calculate the new reorder threshold

Assume demand is 40 units per calendar day, lead time runs from order to stock available for use, and the chosen safety buffer is 200 units. At twenty days, the reorder threshold is 40 × 20 + 200 = 1,000 units. At thirty days, it becomes 40 × 30 + 200 = 1,400 units.

The 400-unit increase is demand during the extra ten days. This is a deterministic planning calculation, not an optimized safety-stock policy or a service-level guarantee. MIT's inventory-policy teaching example distinguishes order quantity, reorder level and safety stock relative to expected lead-time demand.

Use matching day conventions. Forty units per trading day cannot be multiplied by thirty calendar days unless the demand conversion accounts for closed days. Include transit, receiving and inspection if the item cannot be sold immediately on shipment or arrival. Seasonal demand needs the forecast demand over the actual lead-time window, not one annual daily average.

Compare with stock position rather than the shelf count alone

For this example, define stock position as usable physical on-hand stock plus confirmed inbound units less additional committed units not already included in the forward demand forecast. The following commitments are explicitly outside the assumed 40 units per day, so they are deducted once.

At the old threshold of 1,000, the 1,100 position has not reached the reorder signal. At the new threshold of 1,400 it has. The change means the purchasing decision is already due under this policy. Check inbound dates: stock arriving after the relevant demand cannot prevent an earlier shortage.

Do not subtract the same customer orders here and include them again in the 40-unit daily demand. Also remove damaged and unavailable stock from the usable figure. A high stock balance can conceal the wrong item, a reserved quantity or units that cannot be sold.

Calculate the lot and its payment dates separately

Assume the chosen lot remains 1,000 units at $12 each. The supplier asks for 30% on order and 70% at delivery thirty days later. The order costs $12,000, with a $3,600 deposit now and $8,400 balance later. Increasing the reorder threshold does not automatically change that lot or create a $4,800 payment for the extra 400 threshold units.

The $4,800 is the cost equivalent of the higher threshold at $12 per unit. Actual cash depends on the order being placed, the lot, deposits, credit terms and other stock already held. Keep the deposit and balance as parts of the same $12,000 invoice; do not pay the deposit plus the full order value in the forecast.

Recognize when the new order is already too late

Suppose the existing 400 inbound units arrive on day ten, the additional 200 committed units are delivered immediately, and demand then continues at 40 per day. Before the newly ordered stock arrives on day thirty, available supply is 900 + 400 − 200 = 1,100 units against 1,200 units of forward demand. That leaves a 100-unit shortage before allowing for the desired safety buffer.

Placing the standard order today does not fill those earlier missing units. Compare a genuinely available partial shipment, substitute, demand rescheduling or other feasible response, with its cost and cash date. Do not assume an expedited delivery exists simply because the spreadsheet needs one. A payment deposit can be due before the shortage is resolved.

Check shelf life, storage and cash before increasing the lot

A larger order may lower unit purchase cost while increasing expiry risk or cash tied up before sale. Compare the discount with the amount likely to sell during the usable life, the space needed and the supplier payment calendar. Treat the 200-unit buffer as a decision input to revisit when variability changes, rather than a universal rule.

The cash conversion cycle guide follows overlapping stock orders into a funding gap. The contribution guide checks whether extra sales cover their costs, and the weekly cash forecast puts purchase commitments beside payroll and collections.