What is reorder point and reorder point formula

The reorder point, also known as ROP, is the inventory level at which an order is triggered to replenish the inventory stock.

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1. WHAT IS REORDER
POINT AND REORDER
POINT FORMULA?

2. The reorder point, also known as ROP, is the inventory level at which an order is
triggered to replenish the inventory stock. Read more from this article.
Inventory management is a complex task. There are thousands of SKUs to
manage every day and you need to ensure the availability of all of them. You
also need to deliver a high service level, keeping low operational cost and avoid
stock shortages. The lack of just one item in your factory may represent a huge
lost profit per line stoppage.

3. Your administration staff may take time to calculate the right quantities to avoid
such shortage. This process can be automated by introducing the Reorder Point
methodology.
Let’s see the concept of the reorder point; know the related formula and the
advantages of introducing this methodology.

4. The reorder point, also known as ROP, is the inventory level at which an order is triggered to
replenish the inventory stock. Inventories are consumed over time, so that upon reaching
the ROP, the item is reordered. Each article or SKU has its own reorder point. Essentially, the
reorder point lets you place an order at the right time before the stock reaches the
replenishment limit.
What is a Reorder Point (ROP)?

5. The order point (ROP) model requires data input. By using an algorithm, the system will be
able to provide the ROP. These are the input data:
•The rate of consumption of the item
•The lead time the item takes to arrive at your factory
•The level of your safety stock
It is important to consider that the model is dynamic. That means all variables and
parameters suffer changes throughout time. It is recommended to review it and update it
every 3 –6 months.
Let’s see an example. If the consumption of a given bearing was 10 units/month last quarter,
it does not mean it will be always like that!
Components of the Reorder Point (ROP)

6. You may have introduced preventive maintenance at your factory. By introducing a
lubricating schedule, you reduced significantly that consumption rate. On the other side,
you may duplicate your machinery and your consumption rate is higher now.
Keep in mind that the more historical data you have, the lower the data variability (i.e. the
consumption rate), the greater the model accuracy.
Use this model along with additional data, such as:
•Quality or brand changes
•Changes of suppliers or manufacturers
•Changes in your bill of materials
•Growth or decrease in your business
•Teamwork
•Common sense

7. The order point (ROP) automatically activates the stock requirements. The ROP model is a
useful decision-making tool and helps you optimize your inventory list and save
administrative time. This fact allows you to focus on adding value to your organization while
letting the system run automatically. Some of the advantages of using this system are:
•Ensure a higher service level, either with external or internal customers
•Avoid delays or bottlenecks throughout the supply chain
•Avoid getting the items too early
•Reduce inventory cost
•Optimize your inventory space
•Staff save time and focus on value-added activities
•Replace your feelings with facts and data
Benefits of using the Reorder Point (ROP)

8. The Reorder point (ROP) needs to be calculated per item. Spreadsheets or ERP systems can
help you to calculate them automatically. The ROP formula is:
ROP = Average consumption during lead time + Safety Stock
ROP = LT * AD + SS
Where,
LT: Average Lead Time
AD: Average Demand
SS: Safety Stock
Reorder Point Formula

9. The reorder point formula is based on a mathematical model, and therefore there are some
assumptions as described below:
•Demand rate is constant
•Lead Time is constant.
•Purchasing orders are released per batch
•The purchasing orders are released when reaching the ROP
•Replacement occurs all at once.
Assumptions in the Reorder Point Formula

10. The LT (Lead Time) is the period of timein which the order must be released to avoid falling
under the SS (Safety Stock). Lead time is measured from when the order is placed (TROP)
until when the order arrives at your factory (Arrival).
The lot size is the volume in units per order released. The lot size can be also optimized by
introducing the economic order quantity model (EOQ).
As you probably know, the safety stock (SS) is the stock that covers fluctuations in demand.
If for any reason your supplier delays the delivery of an item or the consumption rate
increases, the safety stock will cover the shortage of items. The next time you release a
purchase order, you will cover the consumed safety stock plus the lot size.
Assumptions in the Reorder Point Formula

11. Let’s clarify with another example. Your organization uses on average 100 units of raw
material per day and you keep 1000 units as a safety stock. Suppose that the orders take on
average of 3 days to arrive. The reorder point is as follows:
Average consumption during lead time = 100 units/day * 3 days = 300 units
ROP = 300 units + 1000 units
ROP = 1300 units
Assumptions in the Reorder Point Formula

12. Note that the lot size is not 1300 units, but the point at which replenishment is triggered. It
means that you need to set the ROP in 1300 units on your replenishment system for this
item and supplier. If you change the supplier, it will also change the delivery time, be sure to
consider this fact on your system.
If the consumption rate increases, the next ROP will be sooner. Instead, if the consumption
rate decreases, the next ROP will come later.
Let’s assume now that during the delivery time of the previous example, the consumption
rate increased to 500 units. That was more than the expected 300 units. Thus, you will use
200 units of your safety stock.
Assumptions in the Reorder Point Formula

13. Alternatively, if the lead time and/or the consumption rate fluctuate too much or you don’t
have safety stock, you can use maximum figures.
ROP = Maximum Lead Time * Maximum Demand
Finally, keep always in mind to use the same units! If you express the demand in units per
day, then use the lead time in days. If you express the demand in units per month, the lead
time will be in months, and so on.
Assumptions in the Reorder Point Formula

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