Key Difference – Reorder Level vs Reorder Quantity
Reorder level and reorder quantity are two commonly used terminology that becomes very important in ordering raw materials for production. Deciding the reorder level and reorder quantity is essential in order to allow smooth production where delays will be costly. The key difference between reorder level and reorder quantity is that reorder level is the inventory level at which a company would place a new order for a stock of raw materials for production whereas reorder quantity is the number of units that should be included in the new order. Maintaining healthy relationships with raw material suppliers is essential in order to receive inventory once the reorder level is reached.
CONTENTS
1. Overview and Key Difference
2. What is Reorder Level
3. What is Reorder Quantity
4. Side by Side Comparison – Reorder Level vs Reorder Quantity
5. Summary
What is Reorder Level?
Reorder level, also called the ‘reorder point,’ is the inventory level at which a company would place a new order for a stock of raw materials for production. Theoretically, it was assumed that there should not be a time gap between ordering and obtaining the raw materials. Thus, the company can order new raw materials once the current stock level drops to zero and the suppliers will instantly deliver the raw materials. However, it is practically almost impossible and excessively costly to operate such a perfect procurement system. Thus, companies understand the importance of maintaining a buffer (excess) stock and the new stock will be ordered once the current inventory levels reach a predetermined level.
How to Calculate the Reorder Level?
Reorder level is calculated as,
Reorder level = Average daily usage rate x lead time in days
E.g. DEF Company is a manufacturing company that has an average daily usage rate of material is 200 units and the lead time is 12 days. Thus,
Reorder level = 200* 12 = 2,400 units
When the inventory level reaches 2,400 units, the new order for raw materials should be placed.
Reorder level works as a warning of the consequences such as delays in production, as such delays can be minimized and the new order can be placed on time.
Figure 01: Reorder level
(1. Safety stock, 2.Safety stock + expected need during reordering, 3. Inventory-level, 4. Stocastic demand during reordering)
What is Reorder Quantity?
Reorder quantity is the number of units that should be included in the new order. This is decided upon finalizing the reorder level where the decision is made regarding how much of new inventory should be ordered. It is equally important as deciding when to place the new order since if sufficient quantity of raw materials are not ordered it will disrupt the production.
How to Calculate the Reorder Quantity?
To calculate the reorder quantity, ‘economic order quantity’ calculation is used. Here, the number of units that should be ordered that minimizes total inventory costs is arrived at,
Economic order quantity = SQRT (2 × Quantity × Cost per Order / Carrying Cost per Order)
Continuing from the above example,
E.g. DEF Company uses a quantity of 15,000 units of raw materials per annum. Its cost per order is $250 with a carrying cost per order is $10. Thus,
Economic order quantity = SQRT (2 × 15,000 × 250 / 10) = 866 units
DEF has to place 17 orders (demand per annum 15,000 divided by order size of 866 units.
What is the difference between Reorder Level and Reorder Quantity?
Reorder Level vs Reorder Quantity |
|
| Reorder level is the inventory level at which a company would place a new order for a batch of raw materials for production. | Reorder quantity is the number of units that should be included in the new order. |
| Nature | |
| Reorder level decides when to order a new stock of raw materials. | The number of units to be ordered is decided based on the reorder quantity. |
| Calculation | |
| Reorder level can be calculated as (Average daily usage rate x lead time in days). | Reorder quantity can be calculated as- SQRT (2 × Quantity × Cost per Order / Carrying Cost per Order). |
Summary – Reorder Level vs Reorder Quantity
The difference between reorder level and reorder quantity is that while reorder level signals the company when to place a new order for raw material, reorder quantity demonstrates the size of the respective order. Large scale companies who produces a number of products uses many components, thus reorder level and reorder quantity will have to be calculated for each of the different types of raw materials and orders should be placed with suppliers on time.
Reference:
1. Obaidullah Jan, “Economic Order Quantity (EOQ).” Economic Order Quantity (EOQ) | Definition | Formula | Example. N.p., n.d. Web. 16 May 2017. <http://accountingexplained.com/managerial/inventory-management/economic-order-quantity>.
2. Obaidullah Jan, “Reorder Level.” Reorder Level | Definition | Formula | Examples. N.p., n.d. Web. 16 May 2017. <http://accountingexplained.com/managerial/inventory-management/reorder-level>.
3. “Accounting-Management.” Re-order Level And Its Calculation. N.p., n.d. Web. 16 May 2017. <http://accountlearning.blogspot.com/2010/05/re-order-level-and-its-calculation.html>.
Image Courtesy:
1. “Inventory control – reorder point and service level” By Poul G assumed (based on copyright claims). (Public Domain) via Commons Wikimedia