How to find Reorder point and Reorder quantity?

First of all, reorder is the term we use for replenishment in inventories when required. The replenishment or reorder will be considered by different terms, different conditions, and different times. It varies from one inventory to another based on the nature of the inventory. 

Nature of inventory means the placement of inventory, goods they are maintaining, the equipment they are using, manpower they have, climate and weather, demand they have, occurrence of the demand, and so on.

What is Reorder point and Reorder quantity?

Reorder Point is the pre-decided number of units the inventory left on hand at which you need to reorder more units from the suppliers to fulfil the demand or the inventory will run out of inventory to fulfil demand. 

Reorder Quantity is the number of units the inventory need to order when the inventory level obtains the reorder point. The reorder quantity is mostly pre-decided and sometimes dynamic according to the demand.

Reorder Point and Reorder Quantity

The above will help you to explain the graphically understand the reorder point and reorder quantity, actually when the inventory level reaches the reorder point it generates some units of goods to reach the required inventory level.

Here, the reorder point and reorder quantity should be calculated based on the demand of the period of time. So we can calculate it with some formulae, prior that we need to know, what is Safety stock?

 Safety stock is an additional quantity of a product that is kept in the warehouse to avoid running out of stock. It acts as a buffer against demand changes.

To find the Reorder point there are 4 formulae we have,

i) when the demand is variable and lead time is constant

    

    𝑆𝑆 = 𝑍(𝜎𝑑 × √𝐿𝑇)

    𝑅𝑂𝑃 = 𝜇𝑑 × 𝐿𝑇 + 𝑍𝑍(𝜎𝑑 × √𝐿𝑇)

ii) when the lead time is variable and demand is constant

    𝑆𝑆 = 𝑍 × 𝑑𝐷 × 𝜎𝐿𝑇

    𝑅𝑂𝑃 = (𝑑𝐷 × 𝜇𝐿𝑇 ) + 𝑍 × 𝜎𝐿𝑇

iii) when both lead time and demand are variable

    𝑆𝑆 = 𝑍√((𝜇𝐿𝑇 × 𝜎𝑑 2 ) + (𝜇𝑑) 2 × 𝜎𝐿𝑇 2)

    𝑅𝑂𝑃 = (𝜇𝑑 × 𝜇𝐿𝑇) + 𝑍 × 𝜎𝐿𝑇

 where,

        

        SS =Safety stock 

        σ dLT = Standard division of demand during the lead time

        σd= Standard deviation of demand per day 

        LT=Lead time 

        Z= Service level 

        ROP= Reorder point 

        μdLT= Demand mean during the lead time 

        μd= Average daily demand 

        dD= Daily demand 

        σLT= Standard deviation of lead time in days 

        μLT= Average lead time

iv) this will be the common and easy formula for all

    Reorder point = (Average demand * average lead time) + Safety stock

To find a Reorder Quantity 

    Reorder quantity = Average daily usage * average lead time

    Meanwhile,

    

    To calculate Safety stock the common formula is

    Safety stock = ( max. daily usage*max. lead time in days) - (avg. daily usage*avg. lead time in days)

Example

Reorder point

Average Daily Usage = 1,250.7

Average lead time = 1 day

Safety stock = 4,378

Reorder Point = (Average Daily Usage x Average Lead Time in Days) + Safety Stock 

So,

Reorder point = (1,250.7 * 1) + 4,378

Reorder Point = 5,629

Reorder Quantity

Average daily usage = 1,250

Average lead time = 5 days

Reorder quantity = Average daily usage * Average lead time

Reorder quantity  = 1,250.7 * 5

Reorder quantity = 6,253

EOQ (Economic Reorder Quantity) formula

EOQ stands for Economic Order Quantity. EOQ is a tool used to determine the volume and frequency of orders required to satisfy a given level of demand while minimizing the cost per order. Sometimes it also used to calculate reorder quantity.

    EOQ = square root of: [2(setup costs)(demand rate)] / holding costs

Posted by,

Lokesh Venkatachalam