Definition of Reorder Point
The reorder point is the quantity of units in inventory at which time an order should be placed to purchase additional units.
The reorder point is calculated by using the following information:
- The estimated sales in the near future
- The estimated number of days between ordering and receiving the units being ordered
- The number of units of safety stock
The reorder point indicates when to place an order. The economic order quantity indicates the optimum number of units to be ordered.
Example of the Reorder Point
Assume that a company has determined that the reorder point for its Product X is 80 units and its economic order quantity is 400 units. When the inventory level of Product X drops to 80 units, the company places an order for 400 units. The 80 units should be sufficient for meeting its sales (and maintaining some additional units as safety stock) until the 400 units arrive.