Important Differences Between Re-Order Level and Re-Order Quantity

Re-Order Level

The re-order level is the point at which a business or organization reorders or replenishes a particular inventory item. It’s calculated based on factors such as the average usage rate, lead time for replenishment, and desired safety stock. The re-order level triggers the need to place an order for more of the item to ensure that the organization has enough inventory to meet customer demand and avoid stockouts.

Formula for Re-Order Level

The formula for re-order level is:

Re-Order Level = (Average Daily Usage * Lead Time in Days) + Safety Stock

Where:

• Average Daily Usage is the average amount of inventory used each day.
• Lead Time in Days is the time it takes for an order to be delivered once it has been placed.
• Safety Stock is the additional amount of inventory that a company keeps on hand to guard against unexpected fluctuations in demand or supply.

The re-order level formula helps a company determine the optimal amount of inventory to keep on hand and when to reorder more of a particular item. By combining average usage, lead time, and safety stock, the formula ensures that a company has enough inventory to meet customer demand while also avoiding stockouts and excess inventory.

Examples of Re-Order Level

Here are some examples of re-order level in different industries or scenarios:

• Retail store: The re-order level for a retail store may be set at the point when the stock of a particular product dips below a certain level, for example, when the stock of a popular item reaches 50 units.
• Manufacturing: A manufacturing company may set its re-order level for raw materials when its stock of a particular component falls below a certain level, such as 200 units.
• Hospital: A hospital may set its re-order level for medical supplies when the stock of a particular item falls below a certain level, such as 10 units.
• Restaurant: A restaurant may set its re-order level for food ingredients when the stock of a particular item falls below a certain level, such as 5 kilograms.
• Online retailer: An online retailer may set its re-order level for a product when the stock of a particular item falls below a certain level, such as 100 units.

Types of Re-Order Level

Here are three common types of re-order level:

1. Fixed re-order level: A fixed re-order level is set by a company based on its inventory usage patterns and demand. The level remains constant and does not change with fluctuations in demand or usage.
2. Variable re-order level: A variable re-order level changes based on fluctuations in demand and usage. The level is adjusted to reflect changes in usage patterns and to ensure that the company always has enough inventory to meet customer demand.
3. Safety stock re-order level: A safety stock re-order level is set to provide a cushion against unexpected spikes in demand or unexpected shortages in supply. This type of re-order level helps to ensure that the company has enough inventory to meet customer demand even when there are unexpected changes in demand or supply.

Objectives of Re-Order Level

The main objectives of setting a re-order level are:

• To ensure continuous availability of inventory: The re-order level helps ensure that the organization always has enough inventory on hand to meet customer demand and avoid stockouts.
• To minimize inventory costs: By setting a re-order level, the organization can minimize the cost of carrying excess inventory and reduce the risk of obsolescence or spoilage.
• To improve cash flow: By ordering inventory just in time, the organization can reduce the amount of capital tied up in inventory and improve its cash flow.
• To reduce the risk of stock shortages: By setting a re-order level, the organization can reduce the risk of stock shortages that could negatively impact customer satisfaction.
• To improve inventory management: The re-order level helps the organization keep track of its inventory usage patterns and demand, making it easier to manage inventory and make informed purchasing decisions.

Advantages of Re-Order Level

The advantages of setting a re-order level include:

• Improved inventory management: Re-order levels help organizations keep track of their inventory levels, usage patterns, and demand, making it easier to manage inventory and make informed purchasing decisions.
• Increased efficiency: By setting a re-order level, organizations can avoid the time and effort of manually monitoring inventory levels and making frequent orders.
• Reduced inventory costs: Re-order levels help organizations minimize the cost of carrying excess inventory and reduce the risk of obsolescence or spoilage.
• Improved customer satisfaction: By ensuring that inventory levels are adequate to meet customer demand, re-order levels can improve customer satisfaction and reduce the risk of stock shortages.
• Better cash flow: By ordering inventory just in time, organizations can reduce the amount of capital tied up in inventory and improve their cash flow.
• Reduced administrative burden: Re-order levels help automate the ordering process, reducing the administrative burden on employees and freeing up time for other tasks.

Re-Order Quantity

Re-order quantity refers to the amount of inventory that is ordered when the stock of a particular item falls below the re-order level. The re-order quantity is determined based on factors such as demand patterns, lead time, and carrying costs, and is used to ensure that the organization has enough inventory to meet customer demand. The objective of setting a re-order quantity is to strike a balance between holding too much inventory and running out of stock, and to minimize the costs associated with ordering and holding inventory.

Formula for Re-Order Quantity

The Economic Order Quantity (EOQ) formula is used to determine the optimal re-order quantity:

EOQ = √ (2DS / H)

Where:

D = Annual demand

S = Ordering cost per unit

H = Holding cost per unit per year

The formula balances the cost of ordering inventory (S) with the cost of holding inventory (H) to determine the most cost-effective re-order quantity.

Examples of Re-Order Quantity

Here are some examples of re-order quantity in different industries or scenarios:

• Retail store: A retail store may order 100 units of a popular item when its stock falls below the re-order level of 50 units.
• Manufacturing: A manufacturing company may order 1,000 units of a raw material component when its stock falls below the re-order level of 200 units.
• Hospital: A hospital may order 100 units of a medical supply item when its stock falls below the re-order level of 10 units.
• Restaurant: A restaurant may order 10 kilograms of a food ingredient when its stock falls below the re-order level of 5 kilograms.
• Online retailer: An online retailer may order 200 units of a product when its stock falls below the re-order level of 100 units.

Types of Re-Order Quantity

Here are three common types of re-order quantity:

1. Fixed re-order quantity: A fixed re-order quantity is set based on demand patterns and usage, and remains constant regardless of fluctuations in demand or supply.
2. Variable re-order quantity: A variable re-order quantity is adjusted to reflect changes in demand and usage patterns, and is used to ensure that the organization has enough inventory to meet customer demand.
3. Economic Order Quantity (EOQ): The Economic Order Quantity (EOQ) is a mathematical formula that determines the optimal order quantity that minimizes the total cost of ordering and holding inventory. The formula takes into account factors such as demand, lead time, and carrying costs to determine the most cost-effective re-order quantity.

Objectives of Re-Order Quantity

Here are the main objectives of re-order quantity, summarized in points:

• Effective inventory management.
• Minimization of inventory costs.
• Reduction of stockouts.
• Increased efficiency.
• Improved customer satisfaction.
• Balancing the cost of ordering and holding inventory.
• Streamlining inventory management processes.
• Having enough inventory on hand to meet customer demand.

Advantages of Re-Order Quantity

Here are some advantages of using re-order quantity:

• Improved inventory management: Re-order quantity helps organizations to manage their inventory levels more effectively by ensuring that they always have enough inventory to meet customer demand.
• Minimized inventory costs: By using the re-order quantity, organizations can minimize the costs of ordering and holding inventory by balancing the cost of ordering with the cost of holding inventory.
• Reduced stockouts: Re-order quantity helps to reduce the likelihood of stockouts by ensuring that the organization always has enough inventory on hand to meet customer demand.
• Increased efficiency: Re-order quantity helps organizations to streamline their inventory management processes by reducing the time and effort required to manage inventory levels.
• Improved customer satisfaction: By reducing the likelihood of stockouts and ensuring that organizations always have enough inventory to meet customer demand, re-order quantity helps to improve customer satisfaction.

Comparison Between Re-Order Level and Re-Order Quantity

Here is a table summarizing the main differences between re-order level and re-order quantity:

Important Differences Between Re-Order Level and Re-Order Quantity

Here are the main differences between re-order level and re-order quantity:

1. Purpose: Re-order level determines when a new order should be placed, while re-order quantity determines how much inventory should be ordered.
2. Timing: Re-order level is used to determine when a new order should be placed, while re-order quantity is used to determine the size of the order.
3. Inputs: Re-order level is calculated based on the company’s sales, usage, and lead time, while re-order quantity is calculated based on the company’s inventory usage patterns, demand, and available storage space.
4. Impact on Inventory: Re-order level determines the timing of new orders, while re-order quantity determines the amount of inventory that will be ordered and available in the warehouse.
5. Flexibility: Re-order level is usually set based on historical data and remains constant, while re-order quantity may be adjusted based on changes in demand and usage patterns.
6. Cost: Re-order level and re-order quantity both impact the cost of inventory, with re-order quantity affecting the cost of goods sold, and re-order level impacting the cost of holding inventory.
7. Goals: The main goal of re-order level is to ensure that the company has enough inventory to meet customer demand, while the main goal of re-order quantity is to optimize inventory levels and minimize the cost of inventory.

Conclusion Between Re-Order Level and Re-Order Quantity

In conclusion, re-order level and re-order quantity are both critical components of effective inventory management. Re-order level determines when a new order should be placed, while re-order quantity determines how much inventory should be ordered. The two are interrelated, and both should be considered when making decisions about inventory control. Understanding the difference between re-order level and re-order quantity is essential for companies to make informed decisions about their inventory and to optimize their supply chain operations. By properly setting and managing re-order level and re-order quantity, organizations can reduce their inventory holding costs, reduce the likelihood of stockouts, and ensure that they have the inventory they need to meet customer demand.