Order Point

order-point

Order Point (aka Reorder Point) is a key concept within Inventory Management. Order too soon and financials will suffer as too much money is invested in inventory and you may not have enough space to store the inventory. Order too late and you may run out of inventory resulting in waste in the form of stock outs and poor customer service.

The APICS Dictionary, 15th edition, defines Order Point as:

‘a set inventory level where, if the total stock on hand plus on order falls to or below that point, action is taken to replenish the stock. The order point is normally calculated as forecasted usage during the replenishment lead time plus safety stock.’

Order Point formula is:

Anticipated Demand (D) x Lead Time (L) + Safety Stock (SS)

Lead Time factors in how long it will take to receive the goods and is typically measured in days or weeks.

Safety Stock is a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. Think of safety stock as a minimum inventory level established to protect against uncertainty.

When calculating order point you may need to determine the anticipated demand in the same measure as lead time (i.e. daily demand if lead time is defined in days). Then add in safety stock IF safety stock parameters are provided.

For example:

ABC International uses an average of 750 units of its green widget every 30 days, and the number of days it takes for the supplier to replenish inventory is four days. What is the order point for green widgets assuming no safety stock?

  1. Calculate Anticipated Demand (D) in the lead time unit of measure (days)
    • (D) = 750 units per 30 days or (750/30) 25 units per day
    • Lead Time = 4 days
    • Safety Stock = 0 units
  2. Order Point = (D) x Lead Time + Safety Stock
    • 25 units per day x 4 days + 0 units = 100 units

When the inventory balance declines to 100 units, ABC places an order, and the new units should arrive four days later, just as the last of the on-hand widgets are being used up.

Test taking tips…1. Remember to determine the Anticipated Demand in terms of lead time measure (days). 2. Write down the data provided and 3. Take your time and follow through with the formula. The answer is 100 not 25.

Click here to learn more about Order Point and other inventory management concepts.

If you are studying for CLTD or CSCP I encourage you to generally understand and be able to calculate Order Point from various data provided. If you are studying for CPIM, you will need a more thorough knowledge of using and calculating Order Point.

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