Re-order Level or Ordering Point or Ordering Level


Re-order Level or Ordering Point or Ordering Level:

  1. Definition and explanation of re-order point
  2. Formula of re-order level or ordering point
  3. Examples

Definition and explanation:

This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out.

The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity plus the safety  stock quantity.

Formula of Re-order Level or Ordering Point:

The following two formulas are used for the calculation of reorder level or point.

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time

The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided. When safety stock is provided then the following formula will be applicable:

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time + Safety stock

Examples:

Example 1:

Minimum 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 ordering point or re-order level

Calculation:

Ordering point = Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Lead time

= 800 × 30

= 24,000 units

Example 2:

Tow 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:
Material B

3 to 5 weeks
2 to 4 weeks

Calculate re order point for two types of materials.

Calculation:

Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Maximum re-order period

A: 60 × 5 = 300 units
B: 60 × 4 = 240 units

You may also be interested in other articles from “materials and inventory cost control” chapter.

  1. Need for Materials Control
  2. Requirements of a System of Materials control
  3. Stock Control
  4. Ordering Level or Ordering Point or Re-order Level
  5. Minimum Level or Minimum Limit
  6. Maximum Level or Maximum Limit
  7. Danger Level
  8. Economic Order Quantity EOQ

Other Related Accounting Articles:

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