Inventory Control Techniques - Re-order Level

Re-order level is the point of remaining stock when the new order is to be send. In order to calculate the reorder pint, following term should be known:

• Lead Time: Lead time is the time normally take by the supplier in sending goods after placing the order.
• Average Usage: Average usage means average consumption in a particular time period.
• EOQ (Economic Order Quantity): EOQ is the level of inventory order that minimizes the total cost associated with inventory management.
• Safety Stock: Safety stock is the minimum level of stock that is to be maintained to avoid delay.

Calculate:

Re-order level= Maximum usage X Maximum lead time

or

= Minimum stock level + (Average or Normal usage X Average lead time)

Minimum stock level = Re-order level – (Average usage X Average lead time)


Maximum stock level = Re-order level + Re-ordering quantity – (Minimum usage X Minimum lead time)


Danger level = Average usage X Maximum re-order period for emergency purchases


Average stock level

= Minimum stock level + ½ of Re-order quantity

or

= ½ (Minimum stock level + Maximum stock level)