Reorder Level, Minimum, Maximum and Average Stock

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

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.