Inventory Management 101 – Reorder Point Calculation

Two common questions always asked from Supply Chain practioner is

“What is the quantity I should order?”

“When should I place the order?”

The formula for Reorder Point is

(Average Daily Usage X Lead time in Days)+Safety Stock.

Table 1

Table 1 illustrate the formula for calculation and analysis.

·       Reorder quantity

·       Reorder decision, either to order or enough inventory to meet the daily usage

1.    Daily Run rate: Average daily run rate base on either weekly working days or calendar days

2.    Safety stock: Daily run rate *lead time

(F2*H2)

3.    Reorder Quantity : (Average Daily Usage X Lead time in Days)+Safety Stock

(F2*H2)+G2

4.    Reorder Analysis : If Reorder quantity is more than Balance Quantity plus Safety Stock, the decision is to order. As the inventory on hand will not be sufficient to cover the daily run rate for the duration of lead time.

(=IF(I2>(E2+G2),"order","enough")

About the Author

Grace is a freelancer for Supply Chain Management specialized in helping companies reducing operation costs and increase profits through optimized Supply Chain, Sourcing and Procurement Operation.

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