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← Commerce courseCOMMERCE FROM ZERO · MODULE 9A · 9 min READ · FULL COURSE

Replenishment: when and how much to reorder

Deciding When and How Much to Reorder

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1. The story: two companies that stopped guessing each other's needs

In the 1980s, Procter & Gamble and Wal-Mart worked out a closer partnership, starting, in the Harvard case's telling, with a canoe trip between P&G sales executive Lou Pritchett and Sam Walton. [Sourced: HBS case 907-011 abstract] Wal-Mart also built the machinery: a distribution center in 1970 and, by 1975, IBM systems linking store and DC inventory. [Sourced: SCDigest timeline] By 1997 it gave suppliers daily store-level sales through Retail Link. [Sourced: Talk Business 1997]

Across the Atlantic, Barilla had the opposite problem. In the late 1980s its distributors' orders swung wildly. Its proposal: Barilla, not the distributors, would decide shipment quantities, a continuous replenishment program. Some internal teams and distributors resisted. [Sourced: HBS Barilla (A) abstract]

Lesson in one line: the hard part of replenishment is rarely the math. It is who holds the information and who gets to decide.

2. The one idea

Every item has two questions forever: when do I order, and how much? Replenishment is the set of rules, people and software that answer them for every SKU at every location. [General]

3. The kitchen-table version

Your home pantry. You keep a stock of water bottles. You don't wait for zero because the store trip takes time. You reorder when you hit a line, say 8 left, because the trip and the use during it are covered. You buy a box rather than one because trips cost effort. That is a reorder point and an order quantity. [General]

4. The five building blocks

  1. Reorder point (ROP) = demand during lead time + safety stock. When stock position falls to ROP, order. [General]
  2. Safety stock: the cushion for surprises in demand or supply (see Module 9).
  3. Order quantity: how much. Classic answer is EOQ.
  4. Review style: check continuously, or on a schedule (e.g. weekly).
  5. Min/max: simplest practical form. Order up to max when stock falls to min. Common in stores and warehouses, because staff can follow it without software. [General]

EOQ in one paragraph

Ordering often costs money per order; holding stock costs money per unit per year. EOQ is the order size that balances the two: EOQ = square root of (2 x annual demand x cost per order / holding cost per unit per year). Ford W. Harris published it in 1913 in Factory magazine. A 1990 Operations Research paper notes it was then little noticed for decades and rediscovered in 1988. [Sourced: Harris 1913 reprint; INFORMS paper] The model assumes steady demand and fixed costs, so treat it as a starting point. [General]

5. Worked example (the $12 water bottle) [Illustrative, computed by script]

  • Demand 20 a day (7,300 a year); lead time 7 days; safety stock 30.
  • ROP = 20 x 7 + 30 = 170. Order when stock position hits 170.
  • Cost to place an order $50; holding cost = 25% of $5 unit cost = $1.25 a year.
  • EOQ = sqrt(2 x 7,300 x 50 / 1.25) = about 764 bottles, roughly 9.6 orders a year. Order cost about $478 a year, holding cost on average stock (half of 764) about $478. The two roughly match, which is the point of EOQ.
  • Min/max version for a shelf: min 170, max 934 (ROP + EOQ).

6. Who decides: four models [General]

ModelWho decidesTypical fit
Retailer-managedBuyer or system at retailerMost retail
Vendor-managed inventory (VMI)Supplier, using the retailer's stock and sales dataStrong partner, shared data
Continuous / auto replenishmentRules trigger orders from sales or warehouse withdrawalsHigh-volume staples
CPFR (Module 5)Joint plan and exceptionsBig promotions, key accounts

Evidence: grocery's 1990s Efficient Consumer Response work spread continuous replenishment; a 1995 trade report says most programs were then vendor-managed and based on retailer warehouse withdrawal data. [Sourced: Supermarket News 1994, 1995] Campbell Soup's program was studied in an academic paper. [Sourced: Production and Operations Management, 1997, title/abstract only]

7. Store vs DC

  • DC replenishment pulls from suppliers in bigger lots with long lead times.
  • Store replenishment moves small quantities from DC, often daily, limited by shelf space, pack size and delivery calendars.
  • Push vs pull: new or scarce items are usually pushed by a central plan; established items are pulled by sales. Vendors describe blending both. [Sourced: Blue Yonder page; vendor claim]
  • Rule of thumb: the closer to the customer, the smaller the lot and the shorter the horizon. [Our view]

8. Where AI fits

  • Better demand input per SKU and store, daily, even for new items (vendor claims; test before believing). [Sourced: Pattern, o9 pages, claims]
  • Learning lead times and their variability instead of fixed numbers. [General]
  • Setting safety stock by service goal and cost, SKU by SKU. [General]
  • Auto-generating orders and flagging exceptions for people. [General]
  • Gartner predicts only 5% of organizations will make at least 10% of supply chain planning decisions autonomously by 2030, so expect assisted, not hands-off. [Sourced: Gartner, Sept 24 2026]
  • Forward thread: an agent that reorders for you and negotiates with a supplier's agent is where this heads. [Our view]

9. Where it breaks

Wrong stock records (system says 12, shelf has 0), unreliable lead times, minimum order quantities, case packs, promotions, substitutions. Bullwhip (Module 4): each tier reordering from the one below amplifies swings. [General; Sourced: MIT Sloan on bullwhip]

10. Exercise

Your bottle sells 12 a day, lead time 5 days, safety stock 15. Find ROP. If lead time becomes 9 days, what happens? Answer: 75; 123.

11. Quiz

  1. Two parts of a reorder point? Lead-time demand and safety stock.
  2. What does EOQ balance? Ordering cost and holding cost.
  3. What did the Barilla proposal change? Who decides shipment quantities.
  4. Why will AI assist rather than replace planners soon? Gartner's 5% by 2030 prediction; messy data.

Sources

CURIOUS? TEST THE CLUES

Curiosity check

Pick an answer and see why. No scores, no pressure. All shop examples are invented practice scenarios.

01 What are the two parts of a reorder point?
02 Daily sales 12, lead time 5 days, safety stock 15. What is the reorder point?