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|
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, ACA, CFA <--- Hire me on Upwork