Therefore, ABC should set the reorder point for the green widget at 100 units.

For example, ABC International uses an average of 25 units of its green widget every day, and the number of days it takes for the supplier to replenish inventory is four days. The basic formula for the reorder point is to multiply the average daily usage rate for an inventory item by the lead time in days to replenish it. For example, a company can elect to buy the same part from two different suppliers if one supplier requires one day to deliver an order and the other supplier requires three days, then the company's reorder point for the first supplier would be when there is one day's supply left on hand, or three days' supply for the second supplier. The reorder point can be different for every item of inventory, since every item may have a different usage rate, and may require differing amounts of time to receive a replenishment delivery from a supplier. The result is no interruption in production and fulfillment activities, while minimizing the total amount of inventory on hand.

If the purchasing process and supplier fulfillment work as planned, the reorder point should result in the replenishment inventory arriving just as the last of the on-hand inventory is used up. It usually triggers the purchase of a predetermined amount of replenishment inventory. The reorder point tells you when to reorder inventory, so that you won’t run out of stock.

Reorder point excel template