Reorder point formula

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REORDER POINT FORMULA

Even in a relatively simple situation considered in the example above, the amount of calculations involved for arriving at the reorder level is large. In real life situations the assumption of independence in the probability distributions made in the example above may not be valid and the number of time periods may also be large. In such cases the approach adopted earlier can become much more complex.

That is the reason why one can adopt a much simpler formula which gives reasonably reliable results in calculating at what point in the level of inventory a reorder has to be placed for replenishment of stock. The formula along with its application is given below, using the notation developed earlier.

Reorder point = S x L + F ( S x Rx L)
Where
S = Usage in units
L = Lead time in days
R = Average number of units per order
F = Stock out acceptance factor
The stock-out acceptance factor, `F', depends on the stock-out percentage rate specified and the probability distribution of usage (which is assumed to follow a Poisson distribution). For any specified acceptable stockout percentage the value of `F' can be obtained from the figure presented below.

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The Reorder Point Formula