Reorder Level, Minimum, Maximum and Average Stock
Chapter Fourteen
Syllabus topic 3, "Compute Economic Order Quantity and determination of various stock levels"
Pages 37 to 39 of 82
In one line
Reorder level is when to order, minimum is the cushion below which stock should not fall, maximum is the ceiling above which it should not rise, and average is the middle.
Reorder level
Reorder level = Maximum consumption multiplied by Maximum reorder period
Why the maximums. The reorder level must hold out until the new delivery arrives even if everything goes wrong: consumption at its fastest and the supplier at his slowest. Using averages would leave the store empty half the time.
Reorder period, also called lead time, is the time between placing an order and receiving it.
Minimum level
Minimum level = Reorder level less (Normal consumption multiplied by Normal reorder period)
Why normal here. From the reorder level, in the ordinary course, the store will consume at the normal rate for the normal lead time and the delivery will arrive. Whatever is left at that moment is the buffer that exists for the abnormal case.
It is a safety stock, not a target. Falling below it is a signal that something has gone wrong.
Maximum level
Maximum level = Reorder level + Reorder quantity less (Minimum consumption multiplied by Minimum reorder period)
Why the minimums here. Stock is highest when an order arrives at the worst possible moment for stock: the delivery comes as early as it can and consumption in the meantime was as slow as it could be, so least was used from the reorder level before the whole order landed on top of it.
The reorder quantity is usually the EOQ, which is why the two topics are set together.
Average level
Average level = (Minimum level + Maximum level) divided by 2
or, equivalently in the simple case,
Average level = Minimum level + half the reorder quantity
Danger level
Danger level = Normal consumption multiplied by the maximum reorder period for emergency purchase
Below this, ordinary replenishment will not arrive in time and emergency action - buying locally, at a worse price - is required.
The four formulae side by side
| Level | Formula | Which rates |
|---|---|---|
| Reorder | Maximum consumption times maximum reorder period | Both maximum |
| Minimum | Reorder level less (normal consumption times normal reorder period) | Both normal |
| Maximum | Reorder level plus reorder quantity less (minimum consumption times minimum reorder period) | Both minimum |
| Average | Half of (minimum plus maximum) | - |
Maximum, normal, minimum - in that order down the table. That is the pattern worth remembering, and each has a reason above.
Worked example
A material is consumed at a normal rate of 300 units a week, a minimum of 200 and a maximum of 400. The reorder period is 4 to 6 weeks. The reorder quantity is 2,400 units. Compute the reorder level, minimum level, maximum level and average level.
Reorder Level, Minimum, Maximum and Average Stock
| Working note | Computation | Units |
|---|---|---|
| WN 1. Normal reorder period | mid-point of 4 and 6 weeks | 5 |
| WN 2. Reorder level | maximum consumption 400 times maximum period 6 | 2,400 |
| WN 3. Consumption in the normal case | normal 300 times normal period 5 | 1,500 |
| WN 4. Consumption in the best case | minimum 200 times minimum period 4 | 800 |
| Particulars | Units |
|---|---|
| Reorder level, WN 2 | 2,400 |
| Less: Normal consumption over the normal period, WN 3 | (1,500) |
| Total, being the minimum level | 900 |
| Particulars | Units |
|---|---|
| Reorder level, WN 2 | 2,400 |
| Add: Reorder quantity | 2,400 |
| Less: Minimum consumption over the minimum period, WN 4 | (800) |
| Total, being the maximum level | 4,000 |
| Particulars | Units |
|---|---|
| Minimum level | 900 |
| Maximum level | 4,000 |
| Total of the two levels | 4,900 |
The average level is half of 4,900, which is 2,450 units.
Read the reorder period as a range. Four to six weeks gives a minimum of 4, a maximum of 6 and a normal of 5, and each formula takes a different one.
Check the shape of the answer. Minimum below reorder level below maximum, and the average between minimum and maximum. If any of those is out of order, a rate has been used in the wrong formula.
What it does NOT mean
The maximum level is not the storage capacity. It is the level above which holding stock is not justified.
The minimum level is not zero stock. It is the buffer that remains in the ordinary course.
The reorder level is not the average of anything. Both its terms are maximums, deliberately.
Ordering happens at the reorder level, not at the minimum. By the time stock reaches the minimum, the order placed at the reorder level should be arriving.
Quick revision
- Reorder level = maximum consumption times maximum reorder period.
- Minimum = reorder level less (normal consumption times normal reorder period).
- Maximum = reorder level plus reorder quantity less (minimum consumption times minimum reorder period).
- Average = half of (minimum plus maximum), or minimum plus half the reorder quantity.
- Danger = normal consumption times the maximum reorder period for emergency purchase.
- The rates go maximum, normal, minimum down the first three formulae.
- Reorder quantity is usually the EOQ.
- Check: minimum below reorder level below maximum.
Test yourself
1. State the formula for reorder level, and say why both its terms are maximums. Maximum consumption multiplied by maximum reorder period, because the stock held at that level must last until delivery even if consumption is at its fastest and the supplier at his slowest.
2. Why does the maximum level formula use the minimum rates? Because stock is at its highest when the order arrives as early as possible after as little as possible has been consumed from the reorder level.
Reorder Level, Minimum, Maximum and Average Stock
3. Consumption is 200 to 400 units a week, normal 300; reorder period 4 to 6 weeks; reorder quantity 2,400. What is the reorder level? 2,400 units, being 400 multiplied by 6.
4. What does falling below the minimum level indicate? That something has gone wrong - consumption faster than expected or delivery slower - because in the ordinary course the order placed at the reorder level should arrive before stock reaches it.
Answer in one sentence
How are stock levels determined? The reorder level is maximum consumption multiplied by the maximum reorder period; the minimum level is the reorder level less normal consumption over the normal reorder period; the maximum level is the reorder level plus the reorder quantity less minimum consumption over the minimum reorder period; and the average level is the mean of the minimum and maximum, or the minimum plus half the reorder quantity.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.