Re-Order Level vs Re-Order Quantity: Difference and Comparison

Key Takeaways

1. Re-order level: The re-order level is the inventory threshold that signals the need to initiate the reordering process. It represents the inventory level at which a new order should be placed to replenish stock.
2. Re-order quantity: The re-order quantity, also known as the economic order quantity (EOQ), is the number of items that should be ordered when replenishing stock. It is calculated based on demand rate, holding costs, ordering costs, and lead time.
3. Relationship: The re-order level and re-order quantity are interconnected in inventory management. When the inventory level reaches or falls below the re-order level, it triggers the need to place an order. The re-order quantity determines the number of items ordered to return the inventory to an optimal level.

What is Re-Order Level?

Re-Order Level is one of the crucial concepts of inventory management, as it shows the minimum level of inventory that must be maintained to meet customers’ demands during the replenishment lead time. In other words, it is defined as a level at which a new order is to be placed so that there is much stock in hand until the next order arrives.

It depends on two factors: Safety Stock and Lead Time Demand. The objective of the Re-Order Level is to maintain the minimum inventory level to prevent stockouts.

What is Re-Order Quantity?

Re-Order Quantity is another crucial concept of inventory management, as it shows the amount that has to be ordered when the inventory reaches the re-order point. In other words, Re-Order Quantity is defined as the desired amount required to achieve the level. It depends on the EOQ (Economic Order Quantity) formula, which incorporates carrying costs, ordering costs, and demand.

Unlike Re-Order Level, it does not depend on safety stock. Besides, it includes lead time. The objective of Re-Order Quantity is to keep a certain number of stocks so that total inventory costs get minimized or reduced.

Difference Between Re-Order Level and Re-Order Quantity

1. Re-Order Level is defined as a level at which new order is to place for restocking. In contrast, Re-Order Quantity is defined as the desired amount required to reach the level.
2. The purpose of the Re-Order Level is to ensure sufficient stock to meet the demand. While on the other hand, the purpose of Re-Order Quantity is to ensure the quantity of stock to be ordered.
3. The lead time for Re-Order Level includes lead time demand, whereas, comparatively, on the other hand, the lead time for Re-Order Quantity includes lead time.
4. The formula for calculating Re-Order Level is – Re-Order Level = Safety Stock + Lead Time Demand, whereas the formula for calculating Re-Order Quantity is – Re-Order Quantity = (EOQ) Economic Order Quantity. 
5. Talking about safety stocks, Re-Order Level includes safety stock while, on the other hand, Re-Order Quantity does not have safety stock.
6. The objective of the Re-Order Level is to maintain the minimum inventory level to prevent stockouts. At the same time, the objective of Re-Order Quantity is to keep a certain number of stocks so that total inventory costs get minimized or reduced.
7. In Re-Order Level, when an inventory level reaches a certain level, it causes to place a new order. While, on the other hand, in Re-Order Quantity, when a new order is initiated, it decides how much to buy.
8. Re-Order Level is a function of inventory level. In contrast, Re-Order Quantity affects the inventory level directly. 

Comparison Between Re-Order Level and Re-Order Quantity

Parameter of Comparison	Re-Order Level	Re-Order Quantity
Definition	A level at which new order is to place for restocking	The desired amount required to reach the level
Purpose	To ensure that there is sufficient stock to meet the demand	To ensure the quantity of stock to be ordered
Lead Time	Includes lead time demand	Includes lead time
Safety Stock	Includes safety stock	Do not include safety stock
Objective	Maintain the minimum inventory level to prevent stockouts	Maintain a certain number of stocks so that total inventory costs get minimized or reduced
Timing	When an inventory level reaches a certain level, it causes to place a new order	When a new order is initiated, then it decides how much to buy
Relationship with Inventory	It is a function of it	It directly affects it

References

1. https://www.jstor.org/stable/3007785
2. https://www.sciencedirect.com/science/article/abs/pii/S0377221706011404

Last Updated : 07 August, 2023