Re order Level Formula
Re order level formula is given below. Re order level is that level of inventory at which order needs to be placed. Re order level may be calculated by multiplying maximum usage with maximum lead time.
Re order Level = Maximum usage x Maximum Lead Time |
OR
Re Order Level = (Average Usage x Lead Time )+ Safety Stock |
Re order Level Formula Example (Method 1)
Maximum Usage per week = 9,000
Maximum Lead time = 10 weeks
What would be Re order level?
Solution
Re order Level = Maximum usage x Maximum Lead Time
= 9,000 x 10
=90,000 units
Re order Level Formula Example (Method 2)
Average Usage per week = 10,000
Lead time = 5 weeks
Safety stock= 4,000 units
What would be Re order level?
Solution
Re order Level = (Average usage x Lead Time) + Safety
= (10,000 x 5) + 4,000
=54,000 units
Significance of Re order Calculation
It means that when stock level reaches at 90,000 (unit), we must place a new order. Technically it means that, when the new stock will reach in 10 weeks, then the current stock would have finished. Thus re order level calculation is very important factor for effective inventory management.
Re order Level and Lead Time
Lead time is time interval between placing the order and reaching the inventory to the warehouse. Lead time has been classified into three categorize i.e. maximum lead time, minimum lead time and average lead time. Maximum and average lead time is used to calculate re order level by two different formulas as explained above.
No comments:
Post a Comment