Re-Ordering Level
It is the level at which new purchase requisition is initiated by the store keeper because the level of stock is going to touch the minimum level in the store. Re-ordering level is the level of stock between the maximum and minimum level of stock. The minimum stock should be enough for the time being as the new purchase requisition takes sufficient time.
Formula
Re-ordering level = Minimum stock + normal consumption during the lead time
Where,
Lead time = time required to get the fresh delivery of the stock
Another formula is also used to calculate ordering level as given by Wheldon:
Re-ordering level = Maximum consumption x maximum re-order period
The objective of using maximum consumption and maximum re-order period is to make sure that the factory could not face the issue of shortage of stock in case the fresh supply of stock gets stopped due to some uncontrollable events.
Example 1
Aero is engaged in manufacturing gents and ladies shoes in 50 different designs. The company is running its operations since 20 years without any issue. But, recently, it is facing some issues in its inventory. Some inventory items are in the store since 06 months while some stocks are out of stocks which are causing delays in the production. The stock which is very low in quantity in store has following data available:
Maximum level = 5,000 shoe cards
Minimum level = 1,000 shoe cards
Daily demand of shoes cards = 200 shoe cards
It takes around 10 days to receive the fresh supply of shoe cards once the purchase requisition is placed with the purchaser.
Required
You are required to calculate re-ordering level of shoe cards.
Solution
Lead time consumption (10 days) = 200 x 10 = 2,000 shoe cards
Re-ordering level = minimum stock + lead time consumption = 1,000 + 2,000 =3,000