The reorder point is the inventory level that triggers an order to replenish stock. It is calculated as the forecast usage during lead time plus a safety stock amount. The reorder point helps ensure there is enough inventory to meet demand until the replenishment order is received. It does not determine how much to order, only when to order. Factors like demand variability and acceptable stockout risk impact reorder point calculations.

1. Hemwati Nandan Bahuguna Gharhwal University, Srinagar
(A Central University)
Centre for Mountain Tourism & Hospitality Sutdies
M.B.A. (Tourism) IIInd sem
Batch (2013-15)
Subject:REORDERING POINT
Submitted to Submitted by
Dr. RAKESH Dhodi SAURAV RAWAT

2. REORDERING POINT
SUBMITTED BY
SAURAV RAWAT

3. The reorder point ("ROP") is the level
of inventory which triggers an action to replenish that
particular inventory stock. It is normally calculated as
the forecast usage during the replenishment lead
time plus safety stock. In the EOQ (Economic Order
Quantity) model, it was assumed that there is no time
lag between ordering and procuring of materials.
Therefore the reorder point for replenishing the
stocks occurs at that level when the inventory level
drops to zero and because instant delivery by
suppliers, the stock level bounce back.

4. Reorder point is a technique to
determine when to order; it
does not address how much to
order when an order is made.

5. • The reorder point can be different for every item
of inventory, since every item may have a
different usage rate, and may require differing
amounts of time to receive a replenishment
delivery from a supplier.
• For example, a company can elect to buy the
same part from two different suppliers; if one
supplier requires one day to deliver an order and
the other supplier requires three days, then the
company's reorder point for the first supplier
would be when there is one day's supply left on
hand, or three days' supply for the second
supplier.

6. • Predicting an optimal amount of stock for
varying costumer demands is a critical
component in balancing an operation’s
inventory system. Your inventory system
should act as a reserve of products to meet
your sales needs, while minimizing the
amount of cash you have tied up in inventory.
• One of the most widely accepted methods
used for effective inventory management is
the reorder point formula, a standardized
formula that triggers the system the instant
your inventory drops to the reorder point and
places an order before you hit a stockout.

7. The basic formula for the reorder point
is to multiply the average daily usage
rate for an inventory item by the lead
time in days to replenish it.
• Reorder Point = Normal consumption
during lead-time + Safety Stock
• (average period demand)*Lead Time
periods
•

8. • To guard against the later condition, a
company may alter the reorder formula to add
a safety stock, so that the formula becomes:
• (Average daily usage rate x Lead time) + Safety
stock
• This formula alteration means that
replenishment stock will be ordered sooner,
which greatly reduces the risk that there will
be a stockout condition.

9. GOAL
• The goal in ordering is to place an order when the
amount of inventory on hand is sufficient to
satisfy demand during the time it takes to receive
that order (i.e., lead time). There are four
determinants of the reorder point quantity:
• The rate of demand (usually based on a forecast).
• The lead time.
• The extent of demand and/or lead time
variability.
• The degree of stockout risk acceptable to
management.

10. Conclusion
• Implementation of the reorder formula has
worked in a variety of business environments.
It’s a cost-saving method that can help
prevent stockouts, missed opportunities in
sales, and a possible interruption in your
operational process.

11. • In real life situations one never encounters a zero lead
time. There is always a time lag from the date of
placing an order for material and the date on which
materials are received. As a result the reorder point is
always higher than zero, and if the firm places the
order when the inventory reaches the reorder point,
the new goods will arrive before the firm runs out of
goods to sell. The decision on how much stock to hold
is generally referred to as the order point problem, that
is, how low should the inventory be depleted before it
is reordered.
• The two factors that determine the appropriate order
point are the delivery time stock which is the Inventory
needed during the lead time (i.e., the difference
between the order date and the receipt of the
inventory ordered) and the safety stock which is the
minimum level of inventory that is held as a protection
against shortages due to fluctuations in demand.

12. • Several factors determine how much delivery time stock
and safety stock should be held. In summary, the efficiency
of a replenishment system affects how much delivery time
is needed. Since the delivery time stock is the expected
inventory usage between ordering and receiving inventory,
efficient replenishment of inventory would reduce the need
for delivery time stock. And the determination of level of
safety stock involves a basic trade-off between the risk
of stockout, resulting in possible customer dissatisfaction
and lost sales, and the increased costs associated with
carrying additional inventory.
• Another method of calculating reorder level involves the
calculation of usage rate per day, lead time which is the
amount of time between placing an order and receiving the
goods and the safety stock level expressed in terms of
several days' sales.
• Reorder level = Average daily usage rate x lead-time in days

13. • If the average daily usage rate of a material is 50
units and the lead-time is seven days, then:
• Reorder level = Average daily usage rate x Lead
time in days = 50 units per day x 7 days = 350
units
• When the inventory level reaches 350 units an
order should be placed for material. By the time
the inventory level reaches zero towards the end
of the seventh day from placing the order
materials will reach and there is no cause for
concern.
• Re-order point = Average Lead Time*Average
Demand + Service Level*SQRT(Avg. Lead
Time*Standard Deviation of Demand^2 + Avg.
Demand^2*Standard Deviation of Lead Time^2)