Reorder Level

Reorder level (or reorder point) is the inventory level at which a company would place a new order or start a new manufacturing run.

Reorder Level = Lead Time in Days × Daily Average Usage

Lead time is the time it takes the supplier or the manufacturing process to provide the ordered units.

Daily average usage is the number of units used each day.

If a business is holding a safety stock to act as buffer if daily usage accelerates the reorder level would increase by the level of safety stock.

Reorder Level = Lead Time in Days × Daily Average Usage + Safety Stock

Examples

Example 1: ABC Ltd. is a retailer of footwear. It sells 500 units of one of a famous brand daily. Its supplier takes a week to deliver the order.

The inventory manager should place an order before the inventories drop below 3,500 units (500 units of daily usage multiplied with 7 days of lead time) in order to avoid a stock-out.

Example 2: ABC Ltd. has decided to hold a safety stock equivalent to average usage of 5 days. Calculate the reorder level.

Safety stock which ABC Ltd. has decided to hold equals 2,500 units (500 units of daily usage multiplied by 5 days).

In this scenario reorder level would be 6,000 units (2,500 of safety stock plus 3,500 units based on 7 days of lead time).

Written by Obaidullah Jan