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A reorder point is a calculated stock level that, when reached, generates replenishment either through procurment or manufacturing while leaving enough inventory to satisfy demand during the replenishment process.
Reorder points work better in situations where demand is more or less constant and predictable or with slight variation.
All reorder points contain safety stock to absorb variations in demand. The purpose of safety stock is to reduce or eliminate stock outs due to variablility in either demand or replenishment. Safety stock levels are determined by various issues such as lapses in inventory integrity, receiving delays, supplier issues, scrap, damage and demand variability. Safety stock is also dependent on order frequency, desired service levels and forecast accuracy. We’ll cover safety stock levels at a later date.
Reorder points are based on demand history and therefore reactive. Regular periodic review is necessary to maintain the proper reorder point.
When using reorder points it’s very important to maintain communication with your suppliers as reorder points have a degree of “surprise”. This surprise is due to the order being generated by a stocking level rather than set ordering schedule as with periodic ordering. Reorder points usually use consistant order quantities which is usually beneficial for suppliers. The surprise can be deminished through open communication of the demand and changes in the demand, safety stock and any changes in the supply chain parameters that would affect the safety stock.
As with so many issues discussed here you will need to know and understand your demand. You will also need to know your replenishment lead time. Your replenishment lead time must be from the moment your reorder point is reached to the time the replenishment is ready for your use. This means you will need to take into account:
- Purchasing or manufacturing planning lead time.
- Supplier or manufacturing response or production lead time.
- Transit lead time including any possible transit delays such as harbor inspections.
- Receiving process lead time.
- Any inspection or QC leadtime.
The calculation for determining a reorder point is:
(demand x replenishment lead time) + safety stock
Below is a graphic example of the reorder point with simulated usage:
As stated above the order quantity used is usually fixed but should be large enough to ensure you’re not at or below your reorder point when the replenishment is available for use.
For a reorder point system to work you will need a reorder point signal. This can be done using several different methods such as:
- Visual reorder points – This is the infamous crack in the wall method and can be very effective providing you can move the crack when the reorder point changes. Any visual que can work such as: an empty bin, shelving or other indicator. At the company John and I worked together we used a rolling sign on the floor next to the product as a visual reorder point.
- Automated reorder points – These are calculated using a computer and sometimes using MRP. When the item in question reaches the reorder point it is placed on an replenishment exception report or a planned PO or work order is created. Then the planner or procurement specialist reviews the planned orders and releases them as they see fit.
- Kanban – This system is usually used with a card. When the reorder point is reached a card is retrieved and taken to the person assigned to replenish that item.
Reorder points are powerful tools that you can use to ensure material availability without maintaining excessive amounts of material. They do, however, require that you review them at regular intervals to ensure they’re accurate.