REORDER POINT FORMULA: Inventory Management Models : A Tutorial

REORDER POINT FORMULA

The reorder point formula allows us to determine the safety stock (SS) needed to achieve a certain cycle service level. In general, the longer the lead times are, and the greater the variability of demand and lead times, the more SS we will need.

Revisiting the Reorder Point Formula
Fill Rate vs. Cycle Service Level

h2. Revisiting the Reorder Point Formula

Where the formula came from is not important, but notice the implications for safety stock:

  • What happens if lead time is constant?
  • What happens if the demand rate is constant?
  • What happens if both are constant?
  • If you wanted to reduce the amount of safety stock you hold, what is your best option?

Fill Rate vs. Cycle Service Level

  • Cycle service level is concerned with our ability to meet demand during the reorder cycle, when we are most in danger of running out
  • In contrast, fill rate refers to the percent of demand that we are able to meet from stock across all time periods
  • Rule of Thumb:
    • The resulting fill rate for a product will be higher than the cycle service level.
  • The “right” cycle service level for a given fill rate can be found through experience.