Definition of Re-order Level of Stock or Ordering Level
The reorder level of stock is the stock level fixed between maximum and minimum stock levels, at which an order for the replenishment of stock should be placed.
In other words, it is that level of inventory at which purchase order should be placed. The reorder level of stock is generally higher than the minimum level to cover any emergency which may arise as a result of abnormal usage of materials or unexpected delay in obtaining fresh supplies.
Factors Involve in fixing Reorder level of Stock
The factors which are taken into account in fixing the reorder level are:
(a) The consumption rate of material.
(b) The margin of safety.
(c) The time that would elapse between the date of placing the order and the date of the arrival of supplies, or in other words, the normal delivery time or lead time.
(d) The minimum level decided to be maintained.
(e) Cost of storage and interest on capital employed in materials.
(f) Provision for emergencies such as delay in supply and abnormal wastage etc.
Formula to calculate reorder level of stock
The reordering stock level is calculated by applying the following formula:
Re-order Level = Maximum consumption per day/per week etc. x Maximum delivery time
Reorder Level of Stock = Minimum stock + Average consumption during normal delivery time.
The application of formula depends upon the information supplied in a problem. The reorder level is revised from time to time by taking into consideration factors which are likely to change supply and demand for goods.
Following example is given to understand the calculation of reorder level of Stock:
Maximum consumption = 15,000 units per week
Maximum delivery time = 10 weeks
Re-order Level = Maximum per day/per week etc. x Maximum delivery üme
= 15,000 units x 10 weeks
= 1,50,000 units.
Certain accountants do not make any distinction between ‘ordering level‘ and ‘minimum stock level‘ and regard ordering level as equivalent to minimum stock level, but others make a distinction between the two. The latter is lower, since in its fixation no allowance is made for the margin of safety.
The concepts of ‘ordering level’ and ‘minimum stock level’ can be illustrated by means of the following diagram:
CD = Minimum Stock or Safety Stock.
E = Re-order Point.
DE = Lead time usage (consumption of materials during the time to obtain fresh supplies).
AB = Economic Order Quantity, which is ordered when stock falls to point E. When stock level falls to point F, next shipment arrives, raising stock to point to G.