What is reorder level of stock?
July 10, 2010
The reorder level of stock is the point at which stock on a particular item has diminished to a point where it needs to be replenished.
There is typically a lag time between the point at which stock is ordered and the time in which it is delivered. The reorder level of stock is often set at a figure higher than zero to take this time period into account. Therefore, the reorder level is set so that the stock level will reach at or around zero about the time the next shipment of stock is anticipated to arrive.
For example, say Company XYZ has a lead time for ordering stock of 7 days, with a stock demand per day of 5,000 units. To calculate the reorder point, simply multiply the lead time in days by the demand per day. For Company XYZ, the reorder point in this example is:
Reorder Point = 7 days x 5,000 units = 35,000 units
The reorder point in this example occurs when the stock on hand falls to a level of 35,000 units. If Company XYZ likes to keep 60 days of stock on hand, when the stock on hand falls to 35,000 units, Company XYZ will reorder 300,000 units (60 days x 5,000 units per day).
Suppose Company XYZ does not always receive its shipments on time or they like to keep additional stock on hand for emergency situations. This would change the reorder point as a certain level of "safety stock" is built in. For example, say Company XYZ wants to have 2 days of stock on hand at all times. They would build in a safety stock level of 10,000 units (2 days x 5,000 units per day). This would change the reorder level of stock. The new formula is as follows:
Reorder Point = Lead Time x Demand per Day + Safety Level of Stock
The new reorder point for Company XYZ would be:
Reorder Point = 7 days x 5,000 units + 2 days x 5,000 units = 45,000 units
Assuming Company XYZ still places an order for 60 days worth of stock at a time, when the stock on hand falls to 45,000 units, Company XYZ will reorder 300,000 units (60 days x 5,000 units per day).
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