Inventory Planning Formulas: Safety Stock, Reorder Point, and EOQ
How safety stock, reorder point, EOQ, and carrying cost work together, with one worked scenario carried through all four formulas and a practical order of use.
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How these four formulas fit together
Safety stock, reorder point, economic order quantity (EOQ), and inventory carrying cost answer four different questions about the same inventory policy: how much buffer to hold, when to reorder, how much to order, and what holding stock actually costs. They share inputs — the same demand figures and the same carrying-cost rate feed more than one formula — but each one is calculated separately and answers a distinct question. This guide works through one coherent scenario across all four so you can see exactly where each number comes from and how it feeds the next calculation.
The scenario used throughout this guide
A distributor stocks a single SKU with the following figures:
- Average daily demand = 20 units/day
- Maximum daily demand = 32 units/day
- Lead time = 7 days
- Unit cost = $25
- Annual carrying-cost rate = 20% of unit cost
- Ordering cost = $50 per order
- Annual demand = 20 units/day × 365 days = 7,300 units/year
All figures below use consistent units throughout: demand in units per day, lead time in days, and cost in the same currency and per-unit basis. Mixing daily demand with a weekly lead time, or an annual carrying rate with a monthly cost figure, is the single most common source of a wrong result across all four formulas.
1. Inventory carrying cost — what it costs to hold stock
Annual holding cost per unit (H) = Unit cost × Carrying-cost rate
H = $25 × 20% = $5 per unit per year
This per-unit figure (H) is what the EOQ formula below uses directly. Separately, the Inventory Carrying Cost Calculator answers a related but different question: the total annual dollar cost of the inventory you actually hold on average, not just the per-unit rate. Once EOQ is known (next section), average cycle stock is EOQ ÷ 2, so: Average inventory value = (EOQ ÷ 2) × unit cost, and annual carrying cost = that value × 20%.
2. Economic order quantity (EOQ) — how much to order
EOQ = √((2 × D × S) / H)
EOQ = √((2 × 7,300 × $50) / $5) = √146,000 ≈ 382 units
D is annual demand in units, S is the fixed cost per order, and H is the annual holding cost per unit from step 1. EOQ assumes constant, predictable demand and does not include a safety-stock buffer — it answers order size only, independent of when to place that order. Use the Economic Order Quantity Calculator to run your own demand, ordering cost, and holding cost.
Continuing the carrying-cost figure from step 1: average cycle stock is 382 ÷ 2 ≈ 191 units, worth 191 × $25 = $4,775, so the annual carrying cost of holding that average inventory is $4,775 × 20% = $955/year.
3. Safety stock — how much buffer to hold
Safety stock (Average-Max method) = (Maximum daily demand − Average daily demand) × Lead time
Safety stock = (32 − 20) × 7 = 84 units
This is the Average-Max method, useful when you know maximum and average demand but not a demand standard deviation. If you do have a demand standard deviation, the Safety Stock Calculator also offers a service-level method that computes a statistically grounded buffer for a chosen service level. Neither method guarantees zero stockouts; both are planning buffers, not guarantees.
4. Reorder point — when to place the next order
Lead-time demand = Average daily demand × Lead time = 20 × 7 = 140 units
Reorder point = Lead-time demand + Safety stock = 140 + 84 = 224 units
When available inventory position drops to 224 units, it's time to place the next order — for 382 units (EOQ), per step 2. The Reorder Point Calculator supports a known safety-stock figure, the Average-Max method used here, or the service-level method, without requiring a separate safety-stock calculation first.
What each formula answers
| Formula | Question it answers | Result in this scenario |
|---|---|---|
| Carrying cost | What does it cost to hold inventory? | $5/unit/year (H); $955/year on average cycle stock |
| EOQ | How much should we order each time? | ≈ 382 units |
| Safety stock | How much buffer do we need above expected demand? | 84 units |
| Reorder point | At what stock level do we place the next order? | 224 units |
Common mistakes
- Mixing time units. Using daily demand with a lead time in weeks (or vice versa) without converting first produces a reorder point or safety stock figure that is off by a multiple of 7.
- Treating EOQ as if it includes a buffer. The classic EOQ model assumes instant, predictable replenishment and does not include safety stock; order size and buffer size are two separate calculations that happen to share the same demand data.
- Using a carrying-cost rate without a source. The 20% rate in this scenario is illustrative. A real rate should come from your own accounting data (cost of capital, storage, insurance, taxes, shrinkage, obsolescence), not a guess, since it directly changes both H in the EOQ formula and total carrying cost.
- Assuming a fixed reorder point makes stockouts impossible. Demand spikes larger than modeled, supplier delays beyond the stated lead time, and minimum order quantities can all still cause a stockout even at the calculated reorder point.
A practical order of use
- Establish a carrying-cost rate from your own accounting figures.
- Calculate the annual holding cost per unit (H) and use it to find EOQ — your standard order quantity, independent of timing.
- Calculate safety stock from your demand variability and lead time — your buffer, independent of order size.
- Combine lead-time demand with that safety stock to get the reorder point — the trigger level at which you place the next EOQ-sized order.
- Periodically re-check all four as unit cost, demand, or lead time change, since every formula here depends on those same inputs.