What is the Reorder Level Formula?

Reorder Level Formula

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Reorder Level Formula

The reorder level (or reorder point) is the inventory level at which a new order should be placed to replenish stock before it runs out. It’s a critical metric in inventory management to ensure that there’s no interruption in production or sales due to stockouts.

The reorder level takes into account:

  • The lead time (the time between placing an order and receiving the goods)
  • The average demand (or usage) of the item during that lead time.

The formula for the reorder level is:

Reorder Level = Lead Time in Days × Average Daily Usage

Example of the Reorder Level Formula

Let’s dive deeper into a fictional example to illustrate the reorder level concept.

Luna owns a small coffee roastery where she sells bags of freshly roasted coffee beans. One of her most popular beans is the “Golden Arabica.” To ensure she doesn’t run out of stock and disappoint her loyal customers, she needs to determine the reorder level for these beans.

  • Average Daily Sales: Luna sells, on average, 20 bags of “Golden Arabica” coffee beans every day.
  • Lead Time: Luna’s supplier, from the point of order placement to delivery, takes 10 days.

Using the reorder level formula:

Reorder Level = Lead Time in Days × Average Daily Sales

Reorder Level = 10 days × 20 bags/day

Reorder Level = 200 bags

This means when Luna’s stock of “Golden Arabica” drops to 200 bags, she should place a new order with her supplier to ensure she doesn’t run out before the new shipment arrives.

However, Luna knows that demand can occasionally surge, especially during holiday seasons. To protect against sudden spikes in sales, she decides to keep a safety stock of 50 bags.

So, taking safety stock into account:

Reorder Level (with safety stock) = 200 bags (basic reorder level) + 50 bags (safety stock) = 250 bags

With this strategy, Luna would reorder “Golden Arabica” coffee beans when her stock level reaches 250 bags.

This example emphasizes the importance of the reorder level in avoiding stockouts and also illustrates how safety stock can provide an additional buffer against unpredicted demand or supply delays.

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