What is reorder point?

The reorder point is the inventory level that triggers a new order. It is set so that the order arrives just before stock runs out, which keeps goods available without piling up more than needed. A reorder point that is too low causes shortages, and one that is too high ties up cash.

How it works

The standard formula is reorder point = demand per period x lead time + safety stock. The first part is what will be used while waiting for the delivery; the second part is the buffer against surprises. When stock falls to this level, an order of the usual size is placed, and it arrives after the lead time, when the stock is near the safety level.

The rule assumes demand and lead time are reasonably steady. If demand grows or the supplier slows down, the number needs to be updated, or the business will drift into shortages without noticing. The reorder point answers when to order; how much to order is a separate question, often handled with the economic order quantity.

Example

Say a hardware shop sells 30 drills a week, the supplier takes 2 weeks, and the shop keeps a safety stock of 15. The reorder point is 30 x 2 + 15 = 75 drills. When the shelf drops to 75, the shop orders. During the next 2 weeks it sells about 60, leaving about 15 when the order arrives. If the supplier slips to 3 weeks, the shop would sell 90 and be out of stock for about a week. The numbers are an illustration.

How to model it in Machinations

Build a Pool for stock with a Drain for sales. Add a Register that computes the reorder point from demand, lead time and safety stock. Use a state connection so that a Source of orders switches on when the Pool is at or below that value, with a Delay for the lead time on its output. Make lead time and safety stock Levers, and Play to see how often the Pool reaches zero.