The reorder point is the level of inventory which triggers an action to
replenish that particular inventory stock. It is normally calculated as the
forecast usage during the replenishment lead time plus safety stock. In the EOQ
model, it was assumed that there is no time lag between ordering and procuring
of materials. Therefore the reorder point for replenishing the stocks occurs
at that level when the inventory level drops to zero and because instant
delivery by suppliers, the stock level bounce back.
Reorder point is a technique to determine when to order; it does not
address how much to order when an order is made.
Continuous Review System The reorder point for replenishment of
stock occurs when the level of inventory drops down to zero. In view of
instantaneous replenishment of stock the level of inventory jumps to the original
level from zero level. In real life situations one never
encounters a zero lead time. There is always a time lag from the date of
placing an order for material and the date on which materials are received. As
a result the reorder point is always higher than zero, and if the firm places
the order when the inventory reaches the reorder point, the new goods will arrive
before the firm runs out of goods to sell. The decision on how much stock to
hold is generally referred to as the order point problem, that is, how low
should the inventory be depleted before it is reordered.
The two factors that determine the appropriate order point are the delivery
time stock which is the Inventory needed during the lead time and the safety
stock which is the minimum level of inventory that is held as a protection
against shortages due to fluctuations in demand.
Therefore: Reorder Point = Normal consumption
during lead-time + Safety Stock . Several factors determine how much
delivery time stock and safety stock should be held. In summary, the
efficiency of a replenishment system affects how much delivery time is
needed. Since the delivery time stock is the expected inventory usage between
ordering and receiving inventory, efficient replenishment of inventory
would reduce the need for delivery time stock. And the determination of level of
safety stock involves a basic trade-off between the risk of stockout, resulting
in possible customer dissatisfaction and lost sales, and the increased costs
associated with carrying additional inventory.
Another method of calculating reorder level involves the calculation of usage
rate per day, lead time which is the amount of time between placing an order
and receiving the goods and the safety stock level expressed in terms of
several days' sales. Reorder level = Average daily usage rate
x lead-time in days . From the above formula it can be easily
deduced that an order for replenishment of materials be made when the level of
inventory is just adequate to meet the needs of production during lead-time.
= Example = If the average daily usage rate of a
material is 50 units and the lead-time is seven days, then:
Reorder level = Average daily usage rate x Lead time in days = 50 units per day x
7 days = 350 units When the inventory level reaches 350
units an order should be placed for material. By the time the inventory
level reaches zero towards the end of the seventh day from placing the order
materials will reach and there is no cause for concern.
Re-order point = Average Lead Time*Average Demand + Service
Level*√(Avg. Lead Time*Standard Deviation of Demand2 + Avg.
Demand2*Standard Deviation of Lead Time2)
More information on above formulation is given here:
lainventory-management-models-a-tutorial Reorder point = S x L + J Where
S = Usage in units per day L = Lead time in days
R = Average number of units per order J = Stock out acceptance factor
The stock-out acceptance factor, `J', depends on the stock-out percentage rate
specified and the probability distribution of usage.
See also Economic order quantity
Re-order in Aviation is calculated based on actual usage.
References Resources
Reorder Point Software freeware. Use it for simulations and studies.