Reorder Level
The inventory level at which a new order should be placed to replenish stock before it runs out.
The Reorder Level is a predetermined inventory threshold. When your physical stock of a particular material falls to this level, it automatically triggers a purchase order (either manually in smaller factories or automatically in ERPs). The concept is simple: place a new order AT THE RIGHT TIME – not too early (tying up cash) and not too late (causing stockouts).
Why Reorder Level Matters
Reorder level protects you from two problems:
- Stockout: You run out of materials before new stock arrives, causing production stoppage (very expensive for manufacturing)
- Overstocking: You keep too much stock "just in case," tying up cash that could be used elsewhere
The Reorder Level Formula
Reorder Level = (Average Daily Usage × Lead Time) + Safety Stock
Let's break down each component:
1. Average Daily Usage
How much of this material does your factory consume per day, on average?
Example: If you used 1000 kg of steel in 20 working days last month, average daily usage = 1000 ÷ 20 = 50 kg/day
2. Lead Time (Supplier's Delivery Time)
How many days does it take from the moment you place an order until the material physically arrives at your factory?
Example: Your steel supplier needs 10 days from order placement to delivery. During these 10 days, your factory continues to consume steel from existing stock.
3. Safety Stock (Buffer)
Extra inventory kept as a cushion for unexpected situations:
- Supplier delivers late
- Demand suddenly spikes above average
- Quality rejection (material comes but fails QC inspection)
- Emergency rush orders from important customers
Calculating Reorder Level – Real Examples
Example 1: Steel Fabrication Unit
- Average Daily Steel Usage: 50 kg/day
- Supplier Lead Time: 10 days
- Safety Stock: 2 days of consumption to be safe = 50 × 2 = 100 kg
Reorder Level = (50 × 10) + 100 = 600 kg
What this means: The moment your steel stock drops to 600 kg, place a purchase order. By the time the new stock arrives (10 days later), you'll have consumed 500 kg and will be left with 100 kg (the safety stock).
Example 2: Garment Factory
- Average Daily Fabric Consumption: 100 meters/day
- Supplier Lead Time: 15 days (overseas supplier with customs delay)
- Safety Stock: 5 days buffer = 100 × 5 = 500 meters
Reorder Level = (100 × 15) + 500 = 2,000 meters
When fabric stock = 2,000 meters, order immediately. By arrival, you'll have consumed 1,500 meters and retain 500 meters as safety buffer.
Example 3: Electronics Assembler
- Average Daily IC Chip Usage: 5,000 pcs/day
- Supplier Lead Time: 20 days (imported from Japan)
- Safety Stock: 3 days (for unexpected spikes) = 5,000 × 3 = 15,000 pcs
Reorder Level = (5,000 × 20) + 15,000 = 115,000 pcs
Related Inventory Concepts
1. Reorder Quantity (How Much to Order)
This is different from "Reorder Level." Reorder Level tells you WHEN to order; Reorder Quantity tells you HOW MUCH to order.
Most manufacturers use EOQ (Economic Order Quantity) formula, which balances ordering costs vs. holding costs. But a simpler approach for MSMEs:
Reorder Quantity = (Average Monthly Usage) or (Average Monthly Usage + 15% buffer)
Example: If you use 1000 kg steel per month, order 1000-1150 kg at a time.
2. Minimum Stock Level
The absolute lowest stock you can go. If stock falls below this, it's a red alert.
Minimum Stock = Safety Stock (only the buffer, no lead time component)
Using Example 1 (Steel): Minimum Stock = 100 kg
If steel stock ever drops below 100 kg AND no purchase order is active, it's a critical issue.
3. Maximum Stock Level
The maximum quantity you should store (considering warehouse space, capital lock-up, shelf life, etc.).
Maximum Stock = (Reorder Level + Reorder Quantity) - (Minimum Daily Usage × Min Lead Time)
More simply: Max Stock = Reorder Quantity + Safety Stock
Real-world Scenario: What Happens When Reorder Level is Set Incorrectly
Scenario A: Reorder Level Set Too High (₹30 Lakhs Too Much Capital Locked)
Reorder Level = 2,000 kg (unnecessarily high)
- At ₹150/kg, this means ₹3 lakh stock is always sitting idle
- Factory has to buy at 2,000 kg even when 1,000 kg was enough
- Warehouse space fills up; may expire if material has shelf life
- Cash flow is strained; money could be used for other needs
Scenario B: Reorder Level Set Too Low (Production Stops)
Reorder Level = 200 kg (too low)
- During the supplier's 10-day lead time, factory consumes 500 kg
- Stock reaches zero before new order arrives
- Production halts while waiting for material
- Lost production = Lost sales and penalties for late delivery to customers
- Workers sit idle (wage cost continues but no value added)
- In one day, factory could lose ₹5-10 lakhs due to production stoppage
Scenario C: Reorder Level Set Correctly = Smooth Operations
Reorder Level = 600 kg (calculated correctly)
- Stock never exceeds warehouse capacity
- Production never stops due to material shortage
- Safety buffer handles supplier delays or demand spikes
- Capital is efficiently utilized
Common Challenges in Setting Reorder Levels
- Inconsistent Supplier Lead Times: Some deliveries take 10 days; others take 15 days. Many factories use average, but with high variability, even average isn't safe
- Seasonal Demand Variation: "Average daily usage" doesn't work well if demand varies wildly (e.g., textile factories with seasonal orders)
- Ignoring Quality Rejections: If 10% of incoming batches are rejected by QC, your effective reorder level should account for this (order 10% extra)
- Multiple Suppliers with Different Lead Times: Using primary supplier's 10-day lead time works, but if they delay, backup supplier's 20-day lead time doesn't help
- Raw Data Collection Issues: Many MSMEs track usage by "feel" or memory, not actual data. Calculations are then unreliable
Best Practices for Reorder Level Management
- Record Daily Consumption: Implement simple daily stock note in warehouse. This data feeds into accurate reorder calculations.
- Review Lead Times Quarterly: Supplier circumstances change. When lead times shift, recalculate reorder levels.
- Adjust for Seasonality: If December demand is 50% higher than average, increase reorder level for October-November accordingly.
- Add Rejection Buffer: If 5% rejection rate is typical for a material, add 5% extra to reorder quantity calculations.
- Multiple Suppliers = Lower Reorder Levels: If you have 2-3 backup suppliers with different lead times, you can reduce safety stock (faster backup availability).
- Document and Communicate: Publish the reorder level for each material to Purchase, Production, and Stores. Ensure everyone follows the same logic.
Inventory Turnover and Reorder Level
Inventory Turnover = Annual Consumption ÷ Average Inventory
Higher turnover = Materials are ordered frequently in smaller quantities (less cash tied up)
Lower turnover = Large orders, stock sits longer (more cash required)
Reorder level directly impacts turnover. Correct reorder levels lead to healthy turnover and efficient cash management.
How ERP Systems Automate Reorder Levels
Modern manufacturing ERPs simplify reorder level management:
- Auto-Calculate Reorder Level: System takes average daily usage and lead time from historical data, calculates automatically
- Real-time Alerts: The moment stock hits reorder level, automatic alert sent to Purchase department (email, SMS, dashboard)
- Auto-Create PO: Some ERPs can auto-generate purchase orders when stock hits reorder level (for frequently used materials)
- Lead Time Tracking: ERP tracks how long each supplier actually takes; recalculates reorder level if lead time deviates
- Reorder Level by Location: For factories with multiple warehouses, different reorder levels for each location based on local consumption
- What-If Scenarios: "If lead time increases to 15 days, what's the new reorder level?" ERP simulates instantly
- Variance Analysis: Reports showing how often stock actually hit reorder level vs. predictions. Helps fine-tune the formula over time.
See Reorder Level in Action
Don't just read about Reorder Level. See how Karygar automates this process to reduce manual work and errors on your factory floor.