Summary – Reorder Level vs Reorder Quantity Reorder quantity can be calculated as- SQRT (2 × Quantity × Cost per Order / Carrying Cost per Order). Reorder level can be calculated as (Average daily usage rate x lead time in days). The number of units to be ordered is decided based on the reorder quantity. Reorder level decides when to order a new stock of raw materials. Reorder quantity is the number of units that should be included in the new order. Reorder level is the inventory level at which a company would place a new order for a batch of raw materials for production. What is the difference between Reorder Level and Reorder Quantity? Thus,Įconomic order quantity = SQRT (2 × 15,000 × 250 / 10) = 866 unitsĭEF has to place 17 orders (demand per annum 15,000 divided by order size of 866 units. Its cost per order is $250 with a carrying cost per order is $10. DEF Company uses a quantity of 15,000 units of raw materials per annum. Here, the number of units that should be ordered that minimizes total inventory costs is arrived at,Įconomic order quantity = SQRT (2 × Quantity × Cost per Order / Carrying Cost per Order)Į.g. To calculate the reorder quantity, ‘ economic order quantity’ calculation is used.
It is equally important as deciding when to place the new order since if sufficient quantity of raw materials are not ordered it will disrupt the production. This is decided upon finalizing the reorder level where the decision is made regarding how much of new inventory should be ordered. Reorder level works as a warning of the consequences such as delays in production, as such delays can be minimized and the new order can be placed on time. When the inventory level reaches 2,400 units, the new order for raw materials should be placed.
DEF Company is a manufacturing company that has an average daily usage rate of material is 200 units and the lead time is 12 days. Reorder level = Average daily usage rate x lead time in daysĮ.g. Thus, companies understand the importance of maintaining a buffer (excess) stock and the new stock will be ordered once the current inventory levels reach a predetermined level. However, it is practically almost impossible and excessively costly to operate such a perfect procurement system. Thus, the company can order new raw materials once the current stock level drops to zero and the suppliers will instantly deliver the raw materials. Theoretically, it was assumed that there should not be a time gap between ordering and obtaining the raw materials. Reorder level, also called the ‘ reorder point,’ is the inventory level at which a company would place a new order for a stock of raw materials for production. Side by Side Comparison – Reorder Level vs Reorder Quantity Maintaining healthy relationships with raw material suppliers is essential in order to receive inventory once the reorder level is reached.Ĥ. The key difference between reorder level and reorder quantity is that reorder level is the inventory level at which a company would place a new order for a stock of raw materials for production whereas reorder quantity is the number of units that should be included in the new order.
Deciding the reorder level and reorder quantity is essential in order to allow smooth production where delays will be costly. Reorder level and reorder quantity are two commonly used terminology that becomes very important in ordering raw materials for production. Key Difference – Reorder Level vs Reorder Quantity