Reorder Points

Reorder Points are formulated using historical usage information, procurement/replenishment statistics, along with targeted customer service level requirements. Once values are calculated, they must be validated and refined based upon common sense and often user input, before being applied in day-to-day use.

Safety Stock - Safety Stock is established based on item criticality/substitutability, combined with the time required for the full replenishment cycle for each item. A common formula for safety stock is 3-4 times the square root of usage during lead time. For further information, Google "K-Factor".

Lead Time - The total of internal lead time (i.e. time required in order to identify that an item needs to be replenished, time to place and approve the order and transmit the order to the supplier), plus the external lead time (i.e. time require for the supplier to receive the order, pick the order, and transit time to to get the order to your facility, plus the remaining internal lead time required to receive and put-away the incoming items so they are ready to pick.

Usage - The average daily usage, with an eye toward maximum daily usages (judgment is required to decide whether to use the average daily usage, or the maximum daily usage, or some value in between to reflect variability and whether there are frequently "'runs" on usage of the item.

Usage During Lead Time = The average (or maximum) daily usage times the total lead time days

Now that we understand the component parts of Reorder Points (ROPs), the formula for calculating ROPs is:

Reorder Point = Safety Stock  + (Avg/Max Daily Usage * (Internal + External Lead Time [in days])