What is a Reorder Point?

by Craig Anthony

1 min read

A reorder point is an essential measurement utilized in an inventory management system. This point is the inventory level where it is most efficient to submit an inventory order to a supplier. At this time, although inventory is low, there is sufficient inventory on hand to maintain customer demand while the new order is filled and delivered. In addition, this inventory level strategically minimizes the cost of maintaining inventory. The reorder point is used in conjunction with the economic order quantity. This quantity is calculated to be the most efficient level of inventory to purchase at a given time. After determining the economic order quantity, this figure is combined with forecast sales figures to determine at what level of inventory a new order should be purchased. The most important aspect of incorporating the forecast is determining the sufficient amount of lead time. A certain period of time should be calculated as the amount of time needed for the order to be processed. The reorder point is vital for a small business that sells goods. Keeping track of this point, or using reorder point alerts in an inventory management system, allows a small business to minimize costs. Avoidable expenses related to submitting an order to a supplier or maintaining a stock of inventory on site are reduced by incorporating the reorder point into when orders are submitted.

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