The reorder point ( ROP), also reorder level (ROL) or "optimal re-order level",ACCA (the Association of Chartered Certified Accountants), Inventory control, accessed 8 February 2024 is the level of inventory which triggers an action to replenish that particular inventory. It is a minimum amount of an item which a firm holds in stock, such that, when stock falls to this amount, the item must be reordered. It is normally calculated as the forecast usage during the replenishment lead time plus safety stock. In the EOQ (Economic Order Quantity) model, it was assumed that there is no time lag between ordering and receipt of materials.
The two factors that determine the appropriate order point are the delivery time stock, which is the inventory needed during the lead time (i.e., the difference between the order date and the receipt of the inventory ordered), and the safety stock, which is the minimum level of inventory that is held as a protection against shortages due to fluctuations in demand.
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 × 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.
Reorder level = Average daily usage rate × Lead time in days = 50 units per day × 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.
Reorder point = Average Lead Time*Average Demand + Service Level* NC State University: Supply Chain Resource Cooperative, REORDER POINT FORMULA: Inventory Management Models : A Tutorial, published 30 January 2011, accessed 8 February 2024
Reorder point = S × L + J (S × R × L) where