Lead Time, Reorder Level

Lead Time and Reorder Level are important concepts in inventory management. They play a crucial role in determining when to place an order to replenish inventory and how much to order to meet demand while avoiding stockouts. Let’s explore these concepts in detail:

Lead Time:

Definition:

Lead Time refers to the time interval between placing an order for inventory and receiving the ordered goods. It includes the time taken for order processing, manufacturing (if applicable), shipping, and receiving.

Key Components:

Order Processing Time: The time taken to process and approve the purchase order.
Manufacturing Time (if applicable): The time required to produce or assemble the items.
Shipping Time: The time taken for the ordered items to be transported from the supplier to the buyer.
Receiving Time: The time needed to inspect, unload, and check the received goods.

Calculation:

$L e a d T im e =O r d er P rocess in g T im e +M an u f a c t u r in g T im e +S hi pp in g T im e +R ece i v in g T im e$

Reorder Level:

Definition:

Reorder Level is the inventory level at which a new order should be placed to replenish stock before it runs out. It is a critical point that helps avoid stockouts and ensures a continuous supply of goods.

Calculation:

$R eor d er L e v e l =(De man d R a t e ×L e a d T im e) +S a f e t y St oc k$

Key Components:

Demand Rate: The rate at which units are consumed or sold during a specific time period.
Lead Time: The time it takes to receive a new order.
Safety Stock: An additional buffer stock held to account for uncertainties, variations in demand, and other factors.

Explanation:

The reorder level is set by considering the expected demand during the lead time and incorporating a safety stock to account for unexpected fluctuations or delays in the supply chain.

Example:

If the average demand for a product is 100 units per week, the lead time is 2 weeks, and a safety stock of 20 units is deemed necessary, the reorder level would be: $R eor d er L e v e l = (100 u ni t s / w ee k \times 2 w ee k s) + 20 u ni t s = 220 u ni t s$

Relationship between Lead Time and Reorder Level:

The lead time and reorder level are interconnected because the reorder level is determined by considering the demand rate during the lead time.
A longer lead time or higher demand during the lead time may result in a higher reorder level to ensure sufficient stock is available to meet customer demand.

Effective management of lead time and setting an appropriate reorder level is essential for maintaining optimal inventory levels, avoiding stockouts, and ensuring a smooth flow in the supply chain. It involves a careful balance between minimizing holding costs and meeting customer demand in a timely manner.