Reorder Point

Definition

Reorder Point (ROP), also known as reorder level, is the level of inventory which triggers the order for replenishment of inventory.

Formula

 Reorder Point = (Average Lead time x Average usage) + Safety Stock

where:

• Average Lead Time is the average number of days it takes between the moment an order is placed and when the inventory is actually received from the supplier and made available for consumption.
• Average Usage is the average rate of consumption of inventory per day
• Safety Stock is the additional inventory necessary to reduce the risk of a stockout in case of a delay in the order delivery (i.e. due to higher than average lead time) or a higher than average inventory usage.

Explanation

Unlike EOQ which is concerned with how much of inventory is to be ordered, the reorder point determines when the order for inventory is to be placed.

ROP is essentially the normal consumption of inventory during average lead time plus some safety stock if the lead time or inventory usage are variable.

If lead time and inventory usage are constant there will be no stock-outs and hence no need for maintaining a safety stock to guard against the risk. In such cases, ROP is simply calculated as:

 Reorder Point = Average Lead time x Average usage

If however either lead time or inventory usage are variable, which is usually the case, ROP is calculated as follows:

 Reorder Point = (Average Lead time x Average usage) + Safety Stock

The degree of variability of lead time and inventory usage will affect the level of safety stock that will be required to minimize the risk of running out of inventory.

Example

Cars PLC, a car distributor, needs to find when it should place orders for a specific model of car from its manufacturer. Relevant information is as follows:

 Average Sales 20 cars per day Average Lead Time 50 days Safety Stock 100 cars EOQ 2000 cars