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Re-Order Levels
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THE BOSS

Joined: 01-Jan-2006
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    Posted: 22-May-2015 at 12:12


MAXIMUM Re-Order Levels

Maximum level is the stock level which should not normally be exceeded.

The Shop should not keep Qty's Higher than the maximum stock level as it increases the carrying cost of holding unnecessary inventory levels. It is the opportunity cost of holding other inventory items.

The maximum stock level can be calculated by using the following formula:
Maximum Level should technically be Min Re-order Level + Re-order quantity or in the case of Peach Software the Minimum reorder x 2

Other Variables to consider which could effect Min/Max levels -

Supplier Fill Rate / Reliability of your suppliers

Possibility of interruptions to supply

Physical space of Warehouse or showroom

Ideal Display Qty determined by return on space

Velocity of stock movements - e.g. a product which sells every week of every month is more critical to have than a product which sells the same Qty and value but more sporadically such as only 3 months of the year, this could utilise the seasonal re ordering features. 




Edited by peach - 22-May-2015 at 15:40
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Points: 1295 		Post Options Post Options   Thanks (0) Thanks(0)   Quote peach Quote  Post ReplyReply Direct Link To This Post Posted: 22-May-2015 at 12:01

Reorder Level

Minimum Reorder level is the inventory level at which a company would place a new order. This also doubles as the Minimum Qty you would re order at that time.

Minimum Reorder Level = Lead Time in Days × Daily Average Usage

Lead time is the time it takes the supplier to provide the ordered units.

Daily average usage is the number of units used each day using an averaging of sales history.

If a business is holding a safety stock to act as buffer if daily usage accelerates, the reorder level would increase by the level of safety stock.

Reorder Level = Lead Time in Days × Daily Average Usage + Safety Stock

Examples

Example 1: ABC Ltd. is a retailer who sells Yellow Widgets amongst other things. They sell 50 Yellow Widgets daily and their supplier takes 5 Days to deliver re-orders.

The inventory manager should place an order before the inventories drop below 250 units (50 units of daily usage multiplied with 5 days of lead time) in order to avoid a stock-out.

Example 2: ABC Ltd. has decided to hold a safety stock equivalent to average usage of 2 days. Calculate the reorder level.

Safety stock which ABC Ltd. has decided to hold equals 100 units (50 units of daily usage multiplied by 2 days).

In this scenario reorder level would be 350 units (100 of safety stock plus 250 units based on 5 days of lead time).



Edited by peach - 22-May-2015 at 15:27
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