Q. Re-order point - technique of inventory management?

Re-order point: - The re-order point is that stock level at which an order should be placed. Mutually the excessive and inadequate levels of inventory aren't favourable for business. Thus re-order level must not be set up very high or very low. Re-order point is computed by the following formula:

Re-order Level/Point = Lead Time X Average Usage

Lead Time: - Lead time is the time period among the date of placing order and the date of receiving delivery. Lead time may as well be called procurement of inventory.

Average Usage: - Average usage signifies the quantity of inventory consumed daily. Thus re-order point can be identified as the inventory level which must be maintained for consumption during the lead time.

For instance: - Lead time in a business is 15 days with average daily behaviour usage of inventory is 2,000 units. Re-order point of the commerce will be:

Re-Order Point = 15 days X 2000 units = 30000 units.

Safety Stock: - in determining re-order point we have supposed that lead time and average usage rate have been correctly estimated. However in actual practice both of these factors are difficult to predict precisely. Receipt of raw materials may perhaps be delayed beyond the estimated lead time due to floods, strike, transport problems etc. In such circumstances the re-order point will be:

Re-order Point = Lead Time X Average Usage + Safety Stock.