Reorder Level of Inventory

Reorder Level of Inventory

 Reorder Level Reorder level is that level of inventory at which we send the order of buying inventory. In simple words, it is the level between minimum and maximum level. It is fixed on the basis of demand and supply of inventory. It should neither be very low nor very high. We also consider the factors like transport and delay of supply because if there is bad transport service or delay in supply, we have to keep high stock after reaching re-ordering level otherwise production will stop.

Effect of Not Calculation of Reorder Level 

You can not ignore the reorder level. With following example, we make to understand to you. Suppose A Company does not calculate the re-order level sends the purchase order at minimum level of stock. F or example it decides to keep minimum stock level is 1500 units and maximum level of stock is 15000 units. Our daily use of units for productions are 600. Time for buying new stock are 10 days. Now, if you know minimum maths, then you understand that 1500 unit will use just 2 and ½ day. Next 7 and ½ day production will stop. Our machine will stop. Our laborers will be free. So, our fixed cost will increase. This will be the big loss for our business. So, it is very necessary to decide re-order level.

 Formula of Reorder Level

 Maximum Consumption X Maximum Re-order Period for Delivery 

 Or 

 Minimum Level + Consumption during the time required to get fresh delivery 

 Example : 

1. 

Calculate the Re-ordering Level from following information

Maximum Consumption = 3000 units per day

Minimum Consumption = 1500 units per day

Re-ordering Period = 70 to 150 days

Reorder level  = 3000 X 150 = 45000 units

2. 

Calculate the reorder level from the following information 

Minimum level = 150

Maximum level = 1500

Average Consumption of units = 60 units daily

Lead Time ( Time required for fresh delivery) = 10 days 

Reorder level = 150 + ( 60 X 10) = 750 units