Reorder point is important tool for controlling inventory and to ensure that there is no stock out.
Reorder point is dependant on lead time.
It is set in such a manner that if order is placed at reorder point, the material is received by the time the inventory level reaches minimum stock level.
Reorder point shifts with the change in rate of consumption and is set based on average yearly consumption.
The lead time if changes, the reorder point should be adjusted.
In practice, the reorder point is established quite correctly based on:
Rate of consumption
Reorder point is normally calculated by computer automatically.
CALCULATION OF MAXIMUM, MINIMUM, REORDER AND AVERAGE STOCK LEVELS The formulae used for fixing various levels are: Maximum level = Reordering level Expected minimum consumption in - units during least time to obtain delivery + Reorder quantity Maximum level = Reorder level - Average usage per period x Average time to obtain delivery Reorder level = Maximum reorder period x Maximum usage Maximum level + Minimum level Average stock level = 2 Reorder Point = Average daily usage x Lead time in days + Safety Stock
An operating plant faces new problems every time, which have an impact on inventory control activities.
Rate of consumption of materials, order quantity, reorder point and lead time undergo changes for one or the other reasons and disturb the theoretical inventory control model.
EFFECT OF HIGHER RATE OF CONSUMPTION Lead time Receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Time Normal rate of consumption Higher rate of consumption Need for early replenishment of materials Inventory Level The effect of higher rate of consumption of material call for replenishment of inventory earlier than schedule
EFFECT OF LOWER RATE OF CONSUMPTION Scheduled Lead time Planned receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Time Normal rate of consumption Lower rate of consumption Need for delayed replenishment of lead time Inventory Level The lower rate of consumption on inventory would generate high inventory in the stock and therefore call for delay in replenishment of materials
INCREASE IN INVENTORY LEVEL DUE TO SHORTER LEAD TIME THAN THE SCHEDULED LEAD TIME Scheduled Lead time Planned receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Time Normal rate of consumption Inventory Level Maximum inventory level is higher than the normal level Shorter lead time Actual receipt of material
SHORTAGE OF INVENTORY DUE TO LONGER LEAD TIME THAN THE SCHEDULED LEAD TIME Scheduled Lead time Planned receipt of materials Safety-stock Reorder point Working quantity Minimum-level Maximum-level Time Inventory Level Longer lead time Actual receipt of material Order quantity Shortage of inventory