Re order Level Formula
Re order level formula is
given below. Re order level is that level of inventory at which order needs to
be placed. Re order level may be
calculated by multiplying maximum usage with maximum lead time.
Re
order Level = Maximum usage x Maximum Lead Time
|
OR
Re
Order Level = (Average Usage x Lead Time )+ Safety Stock
|
Re order Level Formula Example (Method 1)
Maximum
Usage per week = 9,000
Maximum
Lead time = 10 weeks
What
would be Re order level?
Solution
Re
order Level = Maximum usage x Maximum Lead Time
=
9,000 x 10
=90,000 units
Re order Level Formula Example (Method 2)
Average
Usage per week = 10,000
Lead
time = 5 weeks
Safety
stock= 4,000 units
What
would be Re order level?
Solution
Re
order Level = (Average usage x Lead Time) + Safety
=
(10,000 x 5) + 4,000
=54,000
units
Significance of Re order Calculation
It means that when stock level reaches at
90,000 (unit), we must place a new order. Technically it means that, when the
new stock will reach in 10 weeks, then the current stock would have finished. Thus
re order level calculation is very important factor for effective inventory
management.
Re order Level and Lead Time
Lead time is time interval between placing
the order and reaching the inventory to the warehouse. Lead time has been
classified into three categorize i.e. maximum lead time, minimum lead time and
average lead time. Maximum and average lead time is used to calculate re order
level by two different formulas as explained above.
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