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4.02D Calculating A Reorder Point KEY

The reorder point is the inventory level at which a company would place a new order. There are two formulas for calculating the reorder point: 1) Reorder Point = Lead Time x Daily Average Usage, and 2) Reorder Point with Safety Stock = Lead Time x Daily Average Usage + Safety Stock. The document provides examples of how to use each formula to calculate the reorder point for a company.

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623 views2 pages

4.02D Calculating A Reorder Point KEY

The reorder point is the inventory level at which a company would place a new order. There are two formulas for calculating the reorder point: 1) Reorder Point = Lead Time x Daily Average Usage, and 2) Reorder Point with Safety Stock = Lead Time x Daily Average Usage + Safety Stock. The document provides examples of how to use each formula to calculate the reorder point for a company.

Uploaded by

Angel Tumamao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

4.

02 Calculating a Reorder Point KEY (page 1)


The reorder point (or reorder level) is the inventory level at which a company would
place a new order or start a new manufacturing run.

The following two formulas are used for the calculation of a reorder point or level
for maximum daily or weekly or monthly usage × Lead time and a reorder level for
maximum daily or weekly or monthly usage × Lead time + Safety stock.

#1 Formula for Reorder Point (Level) = Lead Time x Daily Average Usage
 Lead time is the time it takes the supplier or the manufacturing process to
provide the ordered units.

 Daily average usage is the number of units sold (or used) on a daily.

Example:
ABC Ltd. is a retailer of footwear. It sells 500 units of one of a famous brand daily. Its
supplier takes a week to deliver the order. At what quantity should the inventory
manager place his/her next order?

The inventory manager should place an order before the inventories drop below 3,500
units (500 units of daily usage multiplied with 7 days of lead time) in order to avoid a
stock-out.

#2 Formula for Reorder Point (Level) with Safety Stock= Lead Time × Daily Average
Usage + Safety Stock

If a business is holding a safety stock to act as buffer if daily usage accelerates the
reorder level would increase by the level of safety stock.

Example:
ABC Ltd. has decided to hold a safety stock equivalent to average usage of 5 days.
Calculate the reorder level.

Safety stock which ABC Ltd. has decided to hold equals 2,500 units (500 units of daily
usage multiplied by 5 days).
In this scenario reorder level would be 6,000 units (2,500 of safety stock plus 3,500
units based on 7 days of lead time).
4.02 Calculating a Reorder Point KEY (page 2)

Problem 1:

Maximum 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 reordering point

Calculation:
Ordering point or re-order level = Maximum daily, weekly or monthly usage ×  Lead time
= 800 × 30
= 24,000 units

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Problem 2:

Two 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: 3 to 5 weeks
Material B 2 to 4 weeks

Calculate reorder point for two types of materials.


Calculation:
Ordering point = Maximum daily or weekly or monthly usage ×  Maximum re-order period
A: 60 × 5 = 300 units
B: 60 × 4 = 240 units

______________________________________________________________________

Use the Inventory Reorder Point Calculator at


[Link] to confirm your answers.

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