One ongoing challenge is determining the optimal reorder level for items in stores. Regularly reviewing and updating these levels is crucial to ensure that there is always enough stock on hand.
Is there a way to have reorder levels that are constantly updated in real-time? Yes, and I call this approach the Dynamic Reorder Level.
Reorder levels are typically calculated based on consumption patterns. There are simple and more complex ways to do this. In this article, I’ll present a straightforward method to calculate reorder levels without the need for detailed analysis (such as accounting for demand spikes or supply gaps). The aim for this post is not to provide a complex solution but to offer a dynamic way to review and optimize reorder levels.
What is a reorder level?
The reorder level indicates the stock threshold at which it becomes necessary to reorder materials. Essentially, it’s the amount of stock needed to cover consumption until the next delivery arrives.
In the following example, to keep things simple, we'll assume a lead time of one month. Our goal is to find the reorder level for materials in a dynamic way. The solution is to analyze consumption data and automatically calculate the reorder level based on that. The consumption data is derived from transaction logs, and in this example, we'll use the last three months of consumption data.
Simplified Formula:
Reorder level = (Total consumption over the last 3 months) / 3
Reorder quantity = (Reorder level) * 3 - stock to cover the next 3 months consumption
The next step is to compare the current stock level with the calculated Reorder Level. If the stock is below the Reorder Level, you should place an order for the calculated reorder quantity.
Why is this system recommended?
It’s not based on fixed reorder levels and doesn't require manual updates in this system RL and RQ are calculated
For stores managing thousands of items, this live system helps determine when materials need to be ordered.
It's a simple, effective method for deciding what and how much to order.
No need for a line-by-line analysis, this system is suitable for bulk analyse
It automatically calculates/adjust reorder levels for items that are being consumed, while disregarding those that are not.
Here was presented a very simple version. The analyse can be extended:
lead time can be added in the formula (if the lead time is long the reorder level should be increased to cover the lead time)
spike analyse
seasons
etc
Hope that my approach will help someone in daily work.
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