Reorder level

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Reorder level
See also

A reorder level is the point at which stock on hand must be supplied and also the inventory level at which an order should be placed [1]. It is a point or quantity level at which the order for the supply of materials must be placed when materials in stores reach. "The order point is calculated from three factors [2]:

  • the expected usage
  • the time interval between initiating an order and its receipt, referred to as the lead time
  • the minimum inventory, or safety stock"

The formula for figuring reorder level:

  1. Reorder level = Safety stock + (Average usage \( \cdot \) Average reorder period or lead time)
  2. Reorder level = Maximum reorder period \( \cdot \) Maximum usage

Reorder point planning

In the reorder point planning procedure the system collates available warehouse stock with the reorder level. If the available stock falls under the reorder level, then an order proposal is created. The reorder point is made up of the elements, which is the sum of the safety stock plus the supposed average material consumption within the replenishment lead time [3]. There are two types of reorder point planning [4]:

  • Manual reorder point planning - In this type of reorder point planning, reorder level and the safety stock level are manually defined within the appropriate material master.
  • Autonomic reorder point planning - The reorder level and the safety stock level determine the integrated forecasting program. The system uses past consumption data and forecast data to calculate the reorder level and the safety stock level.

Reorder level system

The reorder level system is also called the two-bin system. Its characteristics are [5]:

  • A calculated reorder level is set for each item
  • When the stock level decline to the reorder level, a replenishment order is issued
  • The replenishment order amount is invariably the EOQ
  • The name "two-bin system" comes from a simple method of operating the system whereby the stock is segregated into two bins. In the beginning, stock is drawn from the first bin, and a replenishment order released when it becomes empty.
  • Most organizations operating the reorder level system keep stock records with calculated reorder levels, which trigger off the required replenishment order.

References

Footnotes

  1. S. R. Vallabhaneni 2015, p. 85
  2. J. Lal, S. Srivastava 2009, p. 88
  3. Sap R/3 Black Book 2006, p. 532
  4. Kogent Learning Solutions 2010, p. 147
  5. T. Lucey 2002, p. 232

Author: Gabriela Wojtaszek