The reorder point (ROP), also reorder level (ROL) or "optimal re-order level",[1] is the level of inventory which triggers an action to replenish that particular inventory. It is a minimum amount of an item which a firm holds in stock, such that, when stock falls to this amount, the item must be reordered. It is normally calculated as the forecast usage during the replenishment lead time plus safety stock. In the EOQ (Economic Order Quantity) model, it was assumed that there is no time lag between ordering and receipt of materials.
The reorder point for replenishment of stock occurs when the level of inventory drops down to zero. In a model with instantaneous replenishment of stock the level of inventory jumps to the original level from zero level. In real life situations there is never a zero lead time: there is always a time lag from the date of placing an order for material to the date on which materials are received. As a result, the reorder point is always higher than zero, and if the firm places the order when the inventory reaches the reorder point, the new goods will arrive before the firm runs out of goods to sell. The decision on how much stock to hold is generally referred to as the order point problem, that is, how low should the inventory be depleted before it is reordered.
The two factors that determine the appropriate order point are the delivery time stock, which is the inventory needed during the lead time (i.e., the difference between the order date and the receipt of the inventory ordered), and the safety stock, which is the minimum level of inventory that is held as a protection against shortages due to fluctuations in demand.
Therefore:
Reorder Point = Normal consumption during lead-time + Safety Stock .
Several factors determine how much delivery time stock and safety stock should be held. In summary, the efficiency of a replenishment system affects how much delivery time is needed. Since the delivery time stock is the expected inventory usage between ordering and receiving inventory, efficient replenishment of inventory would reduce the need for delivery time stock. And the determination of level of safety stock involves a basic trade-off between the risk of stockout, resulting in possible customer dissatisfaction and lost sales, and the increased costs associated with carrying additional inventory.
Another method of calculating reorder level involves the calculation of usage rate per day, lead time which is the amount of time between placing an order and receiving the goods and the safety stock level expressed in terms of several days' sales.
Reorder level = Average daily usage rate × lead-time in days .
From the above formula it can be easily deduced that an order for replenishment of materials be made when the level of inventory is just adequate to meet the needs of production during lead-time.
If the average daily usage rate of a material is 50 units and the lead-time is seven days, then:
Reorder level = Average daily usage rate × Lead time in days = 50 units per day × 7 days = 350 units.
When the inventory level reaches 350 units an order should be placed for material. By the time the inventory level reaches zero towards the end of the seventh day from placing the order materials will reach and there is no cause for concern.
Reorder point = Average Lead Time*Average Demand + Service Level*√Avg. Lead Time*Standard Deviation of Demand2 + Avg. Demand2*Standard Deviation of Lead Time2[2]
^NC State University: Supply Chain Resource Cooperative, REORDER POINT FORMULA: Inventory Management Models : A Tutorial, published 30 January 2011, accessed 8 February 2024
^Jain, P. K. (1999). Theory and Problems in Financial Management. Tata McGraw-Hill. ISBN9780074636831.
Resourcesedit
Reorder Point Software freeware. Used for simulations and studies.
May 01, 2024
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This article needs additional citations for verification Please help improve this article by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Reorder point news newspapers books scholar JSTOR February 2024 Learn how and when to remove this message The reorder point ROP also reorder level ROL or optimal re order level 1 is the level of inventory which triggers an action to replenish that particular inventory It is a minimum amount of an item which a firm holds in stock such that when stock falls to this amount the item must be reordered It is normally calculated as the forecast usage during the replenishment lead time plus safety stock In the EOQ Economic Order Quantity model it was assumed that there is no time lag between ordering and receipt of materials Contents 1 Continuous review system 1 1 Example dubious discuss 2 See also 3 References 4 ResourcesContinuous review system editThe reorder point for replenishment of stock occurs when the level of inventory drops down to zero In a model with instantaneous replenishment of stock the level of inventory jumps to the original level from zero level In real life situations there is never a zero lead time there is always a time lag from the date of placing an order for material to the date on which materials are received As a result the reorder point is always higher than zero and if the firm places the order when the inventory reaches the reorder point the new goods will arrive before the firm runs out of goods to sell The decision on how much stock to hold is generally referred to as the order point problem that is how low should the inventory be depleted before it is reordered The two factors that determine the appropriate order point are the delivery time stock which is the inventory needed during the lead time i e the difference between the order date and the receipt of the inventory ordered and the safety stock which is the minimum level of inventory that is held as a protection against shortages due to fluctuations in demand Therefore Reorder Point Normal consumption during lead time Safety Stock Several factors determine how much delivery time stock and safety stock should be held In summary the efficiency of a replenishment system affects how much delivery time is needed Since the delivery time stock is the expected inventory usage between ordering and receiving inventory efficient replenishment of inventory would reduce the need for delivery time stock And the determination of level of safety stock involves a basic trade off between the risk of stockout resulting in possible customer dissatisfaction and lost sales and the increased costs associated with carrying additional inventory Another method of calculating reorder level involves the calculation of usage rate per day lead time which is the amount of time between placing an order and receiving the goods and the safety stock level expressed in terms of several days sales Reorder level Average daily usage rate lead time in days From the above formula it can be easily deduced that an order for replenishment of materials be made when the level of inventory is just adequate to meet the needs of production during lead time Example dubious discuss edit If the average daily usage rate of a material is 50 units and the lead time is seven days then Reorder level Average daily usage rate Lead time in days 50 units per day 7 days 350 units When the inventory level reaches 350 units an order should be placed for material By the time the inventory level reaches zero towards the end of the seventh day from placing the order materials will reach and there is no cause for concern Reorder point Average Lead Time Average Demand Service Level Avg Lead Time Standard Deviation of Demand2 Avg Demand2 Standard Deviation of Lead Time2 2 Reorder point S L J S R L where S Usage in units per day L Lead time in days R Average number of units per order J Stock out acceptance factor The stock out acceptance factor J depends on the stock out percentage rate specified and the probability distribution of usage which is assumed to follow a Poisson distribution 3 See also editEconomic order quantity Production scheduling model Safety stock Extra stock kept to mitigate risksReferences edit ACCA the Association of Chartered Certified Accountants Inventory control accessed 8 February 2024 NC State University Supply Chain Resource Cooperative REORDER POINT FORMULA Inventory Management Models A Tutorial published 30 January 2011 accessed 8 February 2024 Jain P K 1999 Theory and Problems in Financial Management Tata McGraw Hill ISBN 9780074636831 Resources editReorder Point Software freeware Used for simulations and studies Retrieved from https en wikipedia org w index php title Reorder point amp oldid 1204932645, wikipedia, wiki, book, books, library,
