When to Reorder Inventory

The statistical reorder point (ROP) tells managers when to place an order to replenish inventory. When the quantity of an item drops to a particular number, the item is reordered. The ROP is the lowest inventory level at which a new order must be placed to avoid a stockout. To determine the ROP, it is necessary to understand  

Since demand and lead time are never certain, there is a need for safety stock. Safety stock reduces the likelihood of a stock-out. Safety stock is the amount of stock that is held in excess of expected demand and expected lead time due to variable demand and variable lead time. Lead time is time between submitting a purchase order and receiving the purchased items. Lead time, of course, can and does fluctuate. Lead-time variability is the byproduct of  

Desired service levels stipulate the degree of stock-out risk acceptable to management. 

Where d is the average daily demand, L is the average lead time in days (demand and lead time need to be in the same unit of time), Z is the z-score corresponding to the service level, trl is the variance of demand, and 0 i is the variance of lead time. An important note is that everything to the right of the plus sign is used to calculate safety stock. If the variability in demand or lead time was not present, only ROP= d X L would be needed to calculate the ROP. 

The ROP formula can be used for the Mid-Atlantic Hospital System to identify when to order bandages and how much safety stock is required. From past performance, the hospital system has found  

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