Reorder point

What is a reorder point?

The reorder point refers to the inventory level at which a company should initiate the process of ordering more stock from its suppliers to ensure that there is no stockout before the new inventory arrives.

The reorder point takes into account various factors such as the lead time, the average demand rate, and the desired level of safety stock. The goal of setting a reorder point is to avoid stockouts while also minimizing the carrying costs associated with holding excess inventory,

How to calculate the reorder point?

Mathematically, the reorder point can be calculated using the following formula:

Reorder Point = (Average Daily Demand * Lead Time) + Safety Stock

• Average daily demand is the average amount of a product that is sold or used on a daily basis
• Lead time is the time it takes for a new order to be processed, shipped, and delivered.
• Safety Stock is the extra inventory held to account for variations in demand and lead time, ensuring that unexpected fluctuations in demand or delays in delivery do not lead to stockouts.

By setting an appropriate reorder point, businesses can ensure a smooth flow of inventory without risking stockouts that could disrupt operations or customer satisfaction. The actual calculation may be more complex depending on the specific circumstances and any additional factors considered by the company's inventory management practices.