Reorder point procedure

Proper and at the same time economically viable warehousing requires that stocks are constantly adjusted to actual demand. The key question here is: How many stockable individual parts must be available to cover the customers’ probable requirements – at least until experience shows that replenishment can actually be stored? This so-called reorder point (also: reorder level) is a stock level set by the warehousing company, which triggers an automatic order to the producer as soon as it is reached.

In short: The reorder point procedure is a possible variant for determining the point in time or stock level at which replenishment is required. This threshold value, known as the reorder point, can be defined manually or on the basis of empirical values and also includes the period of time that usually elapses between the order and the actual delivery of the goods.

Background and challenges of the order point procedure

The difficulty for a company is to determine the optimum time at which the stock level is realistically still sufficient for a timely supply – and when it is necessary to reorder and store a sufficient quantity. The task of the reorder point procedure is to measure this so-called reorder point stock sufficiently so that the entire requirement can be covered in the time window of the replenishment lead time. Companies usually add a safety stock or minimum stock level to cushion any delays in delivery 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 fallen below. 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 predetermined quantity as soon as the reorder point is reached. Typically, the order is based on the optimum order quantity defined elsewhere.
• Reorder point stock level policy: An alternative variant based on defining a target stock level and ordering exactly as much as is needed to reach this target stock level again when the reorder point is reached.
• Shortage costs: A company only replenishes its stock once the reorder point has been completely used up. However, this requires a very fast, reliable delivery from the manufacturer – and makes it possible to calculate with very low shortage costs.
• Safety stock: As not all stocks are fully recorded at all times, companies typically work with average values in terms of consumption. The aim of safety stock is to compensate for longer procurement times, but it is also a question of balancing the storage costs required for safety stock against the other (reputational) costs to customers caused by unreliable, late delivery.

Unlike the reorder frequency method, the reorder point procedure relies on fixed order intervals.