Store Management

Valuation method (AS-2)

Material ledger and store ledger are same

FSN items

Re-order Level or Ordering Point or Ordering Level:

1. Definition and explanation of re-order point

2. Formula of re-order level or ordering point

3. Examples

Definition and explanation:

This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out.

The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity plus the safety  stock quantity.

Formula of Re-order Level or Ordering Point:

The following two formulas are used for the calculation of reorder level or point.

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time

The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided. When safety stock is provided then the following formula will be applicable:

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time +Safety stock

Examples:

Example 1:

Minimum daily requirement | 800 units |

Time required to receive emergency supplies | 4 days |

Average daily requirement | 700 units |

Minimum daily requirement | 600 units |

Time required for refresh supplies | One month (30 days) |

Calculate ordering point or re-order levelCalculation:Ordering point = Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Lead time= 800 × 30= 24,000 units |

Example 2:

Tow types of materials are used as follows:Minimum usage |  20 units per week each |

Maximum usage | 40 units per week each |

Normal usage | 60 units per week each |

Re-order period or Lead time...