Proper and at the same time economically sensible inventory management requires that inventories are permanently adjusted to actual demand. The central question here is: How many storable individual parts must be available to cover the customers' probable demand - at least until experience shows that supplies can actually be stocked? This so-called reorder point (also: reorder level) is a stock level defined by the storing company, which triggers an automatic order at the producer as soon as it is reached.
In plain language: The reorder point procedure is thus a possible variant for determining from which point in time or stock level it is necessary to order replenishment. This threshold value, also referred to as reorder point, can be set manually or on the basis of empirical values and also includes the time that usually elapses between the purchase order and the actual delivery of the goods.
Background and challenges of the reorder point process
The difficulty for a company is to determine the optimal point in time at which the inventory is realistically still sufficient for timely supply - and at which point it is necessary to reorder and stock a sufficient quantity. The task of the reorder point procedure is to ensure that this so-called reorder level is sufficient to cover the entire requirement in the replenishment lead time window. Companies usually add a safety stock or minimum stock to cushion delivery delays caused by the manufacturer.
With the help of a modern merchandise management system, each withdrawal is automatically checked to see whether certain threshold values have been reached or not. Seasonal variations can also be taken into account.
Important terms in the context of the reorder point procedure:
- Reorder Point Lot Size Policy: A variant based on ordering a pre-determined quantity once the reorder point has been reached. Typically, the order is measured against the optimal order quantity defined elsewhere.
- Order point stock level policy: an alternative variant based on defining a target stock level and ordering exactly as much when the reorder level is reached as is needed to reach this target stock level again.
- Shortage costs: A company does not replenish inventory until the reorder point has been fully consumed. However, this presupposes very rapid, reliable delivery on the part of the manufacturer - and enables calculation with very low shortage costs.
- Safety stock: Since not all inventories are fully recorded at all times, companies typically work with average values in terms of consumption. Safety stock is intended to compensate for extended procurement times, but it is also a question of balancing the storage costs necessary for safety stock with the other (reputational) costs to customers caused by unreliable, late delivery.
Unlike the reorder point procedure, the reorder point procedure uses fixed reorder intervals.
