You may have heard the terms “reorder level” and “reorder quantity” before, but what do they actually mean? In this blog post, we will break down the difference between the two and explain how they can impact your business. Stay tuned!
What is Reorder Level?
- Reorder level is the inventory point at which a company orders more of a product. Reorder level is also referred to as the restocking point or reordering point. Reorder level is the minimum amount of inventory that a company must have on hand to avoid being out of stock.
- Reorder level is determined by taking into account the company’s lead time and its sales demand. A company’s lead time is the amount of time it takes for the company to receive an order from the time the order is placed.
- Sales demand is the amount of inventory that a company expects to sell during its lead time. Reorder level can be expressed as: Reorder Level = Lead Time x Sales Demand. Reorder level is important because it helps companies avoid stockouts, which can lead to lost sales and unhappy customers.
What is Reorder Quantity?
- Reorder quantity is a managerial term used to describe the level of inventory that triggers an order to be placed with a supplier. It is calculated by taking the maximum daily sales volume and adding the desired safety stock.
- Reorder quantity is an important concept because it helps businesses strike the right balance between carrying too much inventory, which ties up capital, and carrying too little, which can lead to lost sales.
- By having a well-defined reorder quantity, businesses can ensure that they have enough inventory on hand to meet customer demand without tying up too much capital in the process.
Difference between Reorder Level and Reorder Quantity
Reorder level and reorder quantity are two terms that are often used interchangeably, but they actually refer to different concepts.
- The reorder level is the point at which it is necessary to replenish inventory. The reorder quantity is the amount of inventory that should be ordered.
- Reorder level is a decision criterion that tells when an order should be placed, while reorder quantity is a decision criterion that tells how much should be ordered.
- Reorder level is mainly dependent on factors such as lead time and safety stock, while reorder quantity takes into account factors such as storage space and ordering costs.
In conclusion, although both criteria are important in inventory management, they serve different purposes.
If you’re still not sure what the difference between a reorder level and quantity is, or how to calculate either one, don’t worry. We’ve created a handy cheat sheet that outlines both concepts and walks you through how to calculate each one. You can download it for free by clicking on the link below. And once you have a good understanding of both quantities, be sure to put them into practice when planning your next inventory order.