Key Takeaways
- The reorder level, also known as the reader point, is the inventory level at which a business decides to replenish its stock.
- The reorder quantity is the inventory a business should order when the reorder level is reached.
What is the Reorder Level?
The reorder level, also known as the reorder point, is the inventory level at which a business decides to replenish its stock. It is the point at which you initiate a new purchase order to ensure a continuous supply of products. Calculating the reorder level accurately is essential for maintaining a balance between carrying costs and the risk of stockouts.
The time it takes for an order to be delivered significantly determines the reorder level. Longer lead times require higher safety stock to prevent stockouts. Businesses with fluctuating demand may set a higher reorder level to account for unexpected spikes in sales.
The desired service level, expressed as a percentage, determines how frequently a business is willing to risk stockouts. Higher service levels require higher reorder levels.
What is Reorder Quantity?
The reorder quantity, also known as the order quantity or economic order quantity (EOQ), is the amount of inventory a business should order when the reorder level is reached. Determining the right reorder quantity is essential for minimizing holding costs and ordering costs while ensuring a consistent supply of products.
The economic order quantity (EOQ) formula minimizes total inventory costs, including holding and ordering costs. By finding the optimal order quantity, businesses can reduce unnecessary expenses associated with excess inventory or frequent small orders. Maintaining the right reorder quantity ensures that the product moves through the supply chain efficiently.
Achieving the right balance between ordering costs and holding costs is essential for minimizing expenses while meeting customer demand consistently. By understanding the factors that influence this and embracing modern inventory management tools, businesses can enhance their competitiveness and profitability in today’s dynamic market.
Difference Between Reorder Level and Reorder Quantity
- Reorder is the inventory level at which a new order should be placed to replenish stock. At the same time, reorder quantity is the quantity of items that should be ordered when the reorder level is reached.
- The reorder level determines when to initiate the reordering process, while the reorder quantity specifies how much to order once the reorder level is reached.
- The reorder level remains constant until it’s adjusted due to demand or lead time changes. In contrast, reorder quantity may vary based on economic order quantity, supplier constraints, or batch sizes.
- The reorder level focuses on mitigating the risk of stockout situations, while reorder quantity addresses the balance between holding excess inventory (costs) and ensuring sufficient stock.
- The reorder level is calculated using the formula: Reorder level = Lead Time Demand + Safety Stock. In contrast, reorder quantity is calculated based on factors like EOQ (Economic Order Quantity) or a predetermined amount.
Comparison Between Reorder level and Reorder Quantity
| Parameters | Reorder Level | Reorder Quantity |
|---|---|---|
| Definition | A new order to replenish stock at the inventory level | The amount of items that should be ordered when the reorder level is reached |
| Purpose | Determines when to initiate the reordering process | Specifies how much to call once the reorder level is reached |
| Variable Nature | Remains constant | It may vary due to EOQ, supplier constraints or batch sizes. |
| Risk Management | Focuses on mitigating the risk of stock-out situations | Addresses the balance between holding excess inventory (costs) and ensuring sufficient stock |
| Calculation | Reorder level= lead time demand + safety stock | Calculated based on factors like EOQ or a predetermined quantity |
Last Updated : 02 March, 2024
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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