Reorder level

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 . 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 :

• 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 . There are two types of reorder point planning :

• 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 :

• 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.

Examples of Reorder level

• Reorder level in retail: In a retail setting, a reorder level is a minimum stock level of a particular item that triggers an alert to the store manager or staff that the item needs to be reordered from the supplier. This is to ensure that there is always a sufficient stock of the item on hand for customers to purchase.
• Reorder level in manufacturing: In a manufacturing environment, a reorder level is the minimum stock level of a particular raw material or component that triggers an alert to the production manager or staff that the item needs to be reordered from the supplier. This is to ensure that there is always sufficient stock of the item on hand for production.
• Reorder level in warehouse: In a warehouse setting, a reorder level is the minimum stock level of a particular item that triggers an alert to the warehouse manager or staff that the item needs to be reordered from the supplier. This is to ensure that there is always a sufficient stock of the item on hand for distribution.

Advantages of Reorder level

Reorder level is a critical inventory management tool that helps to ensure that businesses have the right amount of stock on hand to meet customer demand. It provides the following advantages:

• It helps to reduce the cost of managing inventory by streamlining the ordering process. By setting a reorder level, businesses can ensure that the same items are ordered in the same quantity each time and that orders are placed only when necessary.
• It helps to ensure that customers receive the products they need in a timely manner. When stock is kept at a consistent reorder level, businesses can quickly identify when inventory is running low and place orders before customer demand is affected.
• It helps to minimize overstocking and the associated costs. By keeping a close eye on inventory levels, businesses can ensure that they are not ordering more than necessary and wasting money.

Limitations of Reorder level

The reorder level is a useful tool for inventory management but there are some limitations associated with it. These include:

• The reorder level does not take into account demand fluctuations, meaning that it can be difficult to accurately predict when an order should be placed. This can lead to over-ordering or under-ordering, both of which have their own associated costs.
• It does not consider the cost of goods, meaning that it may be difficult to judge whether it is more cost effective to reorder or to wait for the price to drop.
• The reorder level does not take into account seasonality, meaning that ordering may not be appropriate at certain times of the year.
• The reorder level also does not consider other factors, such as supplier reliability, lead time, or the availability of goods. This can lead to additional delays or unexpected costs.

Other approaches related to Reorder level

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. There are many other approaches that can be used to determine this level, such as:

• Economic order quantity (EOQ): This approach is used to determine the optimal order quantity for a product, taking into account costs of production and storage.
• Safety stock: This is the extra stock that is kept in order to avoid any potential stockouts due to unexpected demand or supply issues.
• Reorder point: This is the point at which an organization will place an order to replenish its inventory.

Overall, the reorder level is an important element of a business's inventory management system, and understanding the different approaches can help an organization determine the most cost-effective and efficient way to manage its stock levels.

Reorder level — recommended articles

Order point — Ordering cost — Cycle stock — Economic batch size — Optimization of the production run-length — Optimum size of the order — Safety stock — Minimum stock level — Fill rate

References

• Kogent Learning Solutions (2010), SAP® MM Questions and Answers, Jones & Bartlett Publishers, Massachusetts.
• Lal J., Srivastava S. (2009), Cost Accounting, Tata McGraw-Hill Publishing Company Limited, New Delhi.
• Lucey T. (2002), Quantitative Techniques, Thomson Lerning.
• Sap R/3 Black Book (2006), Sap R/3 Black Book, Dreamtech Press, New Delhi.
• Vallabhaneni S. R. (2015), Wiley CIAexcel Exam Review 2015 Focus Notes, Part 3: Internal Audit Knowledge Elements, John Wiley & Sons, New Jersey.
• Wild T. (2011), Best Practice in Inventory Management, Routledge, USA.

Footnotes

Author: Gabriela Wojtaszek