Re-order Level or Ordering Point or Ordering
Level:
-
Definition and explanation of re-order point
-
Formula of re-order level or ordering point
-
Examples
This is that level
of materials at which a new order for supply of
materials is to be placed. In other words, at this
level a purchase requisition is made out. This level
is fixed somewhere between maximum and minimum
levels. Order points are based on usage during time
necessary to requisition order, and receive
materials, plus an allowance for protection against
stock out.
The order point
is reached when inventory on hand and quantities due
in are equal to the lead time usage quantity plus
the safety stock quantity.
The following two
formulas are used for the calculation of reorder
level or point.
Ordering point or
re-order level = Maximum daily or weekly or monthly
usage × Lead time
The above formula
is used when usage and lead time are known with
certainty; therefore, no safety stock is provided.
When safety stock is provided then the following
formula will be applicable:
Ordering point or
re-order level = Maximum daily or weekly or monthly
usage × Lead time + Safety stock
Example 1:
|
Minimum daily
requirement |
800 units |
|
Time required
to receive emergency supplies |
4 days |
|
Average daily
requirement |
700 units |
|
Minimum daily
requirement |
600 units |
|
Time required
for refresh supplies |
One month (30
days) |
Calculate ordering point or re-order level
Calculation:
Ordering point
= Ordering point or re-order level = Maximum
daily or weekly or monthly usage × Lead
time
= 800 × 30
= 24,000 units |
Example 2:
|
Tow types of
materials are used as follows:
Minimum
usage |
20 units per
week each |
|
Maximum usage
|
40 units per
week each |
|
Normal usage |
60 units per
week each |
Re-order
period or Lead time
Material A:
Material B |
3 to 5 weeks
2 to 4 weeks |
Calculate reorder point for two types of
materials.
Calculation:
Ordering point
or re-order level = Maximum daily or weekly
or monthly usage × Maximum re-order period |
|
A: 60 × 5 =
300 units |
|
B: 60 × 4 =
240 units |
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