Reorder Point

Tags: Glossary

A predetermined inventory level that triggers the need to place an order, this minimum level provides inventory to meet anticipated demand during the time it takes to receive the order.

What is Reorder Point?

Reorder Point

In the world of logistics, the concept of a "reorder point" plays a crucial role in ensuring the smooth flow of goods and materials. For beginners in this field, understanding the significance of a reorder point is essential.

To put it simply, a reorder point is a predetermined inventory level that acts as a trigger for placing an order. This minimum level of inventory is carefully calculated to meet the anticipated demand during the time it takes to receive the order. By maintaining inventory above this threshold, businesses can avoid stockouts and ensure that they have enough products to fulfill customer orders.

The calculation of the reorder point involves considering various factors, such as lead time, demand variability, and desired service level. Lead time refers to the time it takes for an order to be processed, shipped, and delivered. Demand variability takes into account the fluctuations in customer demand, which can be influenced by factors like seasonality or promotions. The desired service level reflects the level of customer satisfaction a business aims to achieve by having products readily available.

Let's consider an example to illustrate the importance of a reorder point. Imagine a retail store that sells a popular electronic gadget. The store knows that it takes two weeks for the supplier to deliver a new batch of gadgets once an order is placed. Additionally, the store experiences a moderate level of demand variability due to occasional promotions. To ensure they never run out of stock, the store sets a reorder point of 20 gadgets. This means that whenever the inventory level reaches 20 gadgets, a new order is placed to replenish the stock.

By having a reorder point in place, the retail store can avoid the risk of stockouts. If they didn't have a reorder point and waited until they completely ran out of gadgets before placing an order, they would have to endure a two-week period without any inventory. This would result in dissatisfied customers and lost sales opportunities. However, by maintaining inventory above the reorder point, the store can continue to meet customer demand while waiting for the new order to arrive.

In conclusion, a reorder point is a vital concept in logistics that helps businesses maintain a steady supply of inventory. By calculating the minimum inventory level needed to meet anticipated demand during the lead time, businesses can avoid stockouts and ensure customer satisfaction. Understanding and effectively managing the reorder point is crucial for beginners in the field of logistics to ensure the smooth flow of goods and materials.

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