07 May 2013
Reorder Level is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out.
The following two formulas are used for the calculation of reorder level or point.
Ordering point/Re-order level = Maximum daily or weekly or monthly usage × Lead time
The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided.
When safety stock is provided then the following formula will be applicable:
Ordering point or re-order level = Avg daily or weekly or monthly usage × Lead time + Safety/Minimum stock
In first formula you know with certainity your max. demand and lead time so no need to keep safety stock.
In second formulae since your demand or lead time is not certain, so you are keeping safety stock to meet situation of unexpected high demand or non receipt of material in time.
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