Reorder level

Reorder level
See also
Order point Cycle stock Independent demand Economic batch size Maximum stock level ABC method Bin card Master production schedule Fill rate

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.

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