What is the reorder point and how is it calculated?

• A. The stock level at which a new order should be placed; based on lead time, usage rate, and safety stock
• B. The maximum stock level
• C. The minimum stock level
• D. The quantity to order to reach maximum stock

Answer: (A)

Reorder point is the stock level at which you place a new order to prevent stockouts while the replenishment is on the way. It is calculated by estimating how much you’ll need during the supplier’s lead time and adding a buffer to cover variability. The basic formula is: Reorder point = demand during lead time + safety stock. Demand during lead time equals the usage rate multiplied by the lead time. For example, if you use 25 units per day and the lead time is 6 days, the expected demand during lead time is 150 units. If you keep 40 units as safety stock, the reorder point would be 190 units. When on-hand inventory falls to 190, place the order to replenish. The other concepts refer to maximum stock levels, minimum stock levels, or the amount to order to reach a target maximum, not the trigger for reordering.