What Is a Reorder Point and How Does It Keep Your Line from Running Out of Material?

At eleven o'clock on a Tuesday night, the second-shift supervisor stops the assembly line because the metal brackets that go into every unit have run out. The buyer had sent the order on Friday, when the warehouse clerk mentioned that "the pallets were starting to look low," and the supplier needs eight days to deliver. The system still showed a week of stock, because it was counting a lot on quality hold and parts reserved for another production order. For three days, the plant reassigns operators and pays for rush freight, and the customer applies the late delivery penalty set in the contract. The supplier met its lead time; the order went out late because nobody had defined the stock level at which to order.

The reorder point is the stock level at which the next purchase order should be issued. It adds the expected consumption during the lead time to the safety stock.

The late purchase order that stops the line

In many plants, the moment to order material is decided by what the warehouse clerk sees or what the buyer remembers. That approach works as long as consumption and the supplier stay stable. When the production schedule changes or the supplier takes longer, the order goes out late and the shortage shows up on the line, the most expensive place to discover it.

Ordering when the rack looks empty

A pallet of material can last two weeks or two shifts, depending on the production order in progress. Ordering when the rack "looks low" ignores that pace. For a high-consumption component, the visual signal arrives when stock no longer covers the supplier's lead time, and the stoppage becomes unavoidable even if the order goes out that same day.

A lead time nobody updated

The lead time purchasing has on file is usually the one the supplier promised when it was set up. Over the months, the supplier gains customers or changes carriers, and its lead time grows. If purchasing orders with the lead time from two years ago, the material arrives days after the plant needs it.

Stock figures that count material the line cannot use

The stock figure in the system can include parts the line cannot consume: a lot on quality hold, material reserved for another order, damaged parts or inventory in another warehouse. If the buyer decides based on that figure, they believe they have a week of coverage when the line can only use part of it. The shortage is discovered when the production order is picked.

What a reorder point is and what question it answers

The reorder point is the stock level at which the next purchase order should be issued so the material arrives before it runs out. It answers a single question: when to order. When a material's inventory position reaches that level, purchasing issues the order, without waiting for the rack to look empty or for someone to raise the alarm.

When to order and how much to order

Inventory management makes two separate decisions for each material. The first is when to order, and the reorder point settles it. The second is how much to order, and it depends on the cost of each order, the cost of holding inventory and the supplier's minimum lot. When the supplier only sells by the full pallet, each order covers more weeks, and the reorder point still tells you when to order.

How it relates to safety stock

Safety stock is the extra inventory that covers variation in consumption and lead time. The reorder point includes it and sets the moment to order so that buffer stays intact under normal conditions. If the buffer gets used up every cycle, the reorder point is miscalculated or the supplier is often late.

The formula and how to read it in a plant

In its basic form, the reorder point adds two components: reorder point = (average daily consumption × lead time in days) + safety stock. The first term is the material the line will consume while the order arrives. The second is the buffer that absorbs variation. Each variable has an operational meaning.

Daily consumption: what the production schedule calls for

In a plant, the consumption of a material comes from production orders and from the recipe or bill of materials of each product. For materials with stable consumption, such as packaging, consumables or fasteners, the average of recent months is a good basis. For materials tied to a product with a variable schedule, it is better to calculate consumption with the schedule for the coming weeks, because the history describes a pace that has already changed.

Full lead time: from requisition to released material

The lead time that goes into the formula starts when the material reaches the reorder point and ends when it is available to the line. It includes internal approval of the purchase order, the supplier's lead time, transit, the receiving appointment and, when it applies, the quality inspection before the lot is released.

An example with round numbers

Suppose the line consumes a component at a rate of 500 parts a day. The supplier delivers in six days, the order takes one day to approve and quality inspection takes another, so the full lead time is eight days. With a safety stock of 1,000 parts, the reorder point is (500 × 8) + 1,000 = 5,000 parts. When the inventory position drops to 5,000 parts, purchasing issues the order; if everything goes as planned, the material arrives when about 1,000 parts are left in the warehouse.

Inventory position: what you have, what is coming and what is already committed

The right comparison is made against the inventory position, which adds available stock and purchase orders in transit, and subtracts what is already committed to released production orders. If you compare only physical stock, the system reorders material that is already on its way and duplicates the order. If you leave out committed stock, the order goes out late, because part of the stock already has a destination.

Why a fixed reorder point fails in November and December

A reorder point calculated once and left in the system works as long as consumption and suppliers behave as they did the year before. The year-end close changes both at the same time.

Production schedules that move forward

In the last weeks of the year, many plants pull production forward to cover December orders and the year-end shutdown. Daily consumption rises, and a reorder point calculated with the October average triggers the order when stock is already too low. Before a schedule change, it pays to recalculate the reorder point of the affected materials with the new consumption.

Suppliers that stretch their lead times or close for the holidays

Many suppliers cut production in the second half of December or close between Christmas and New Year's, and freight lanes are busier. The lead time of an order issued in mid-December can double. Ask your key suppliers for their schedule and add the closing days to the lead time of orders that go out in those weeks.

How to make the reorder point work every day

Continuous review or periodic review

With continuous review, the inventory position is compared against the reorder point with every transaction, and the order is issued as soon as the level is crossed. With periodic review, purchasing reviews materials on a fixed day of the week. In that case, the reorder point must cover the lead time plus the period between reviews, because a material can cross its level the day after the review and wait a whole week.

One owner and a daily list

The reorder point protects the line when someone acts on it. Assign an owner for each material family and a daily list with the materials that crossed their level, their inventory position and their open orders. If an order is held up by budget or by the lack of a supplier, the list records it and production knows in advance which material is at risk.

Real-time stock and purchasing on the same platform

At Oasys we have spent more than 25 years developing management systems for companies in Mexico. Our platform integrates ERP, WMS, TMS and Production, with real-time stock by company and by warehouse. Purchasing, purchase orders and receiving are recorded in the same system that controls the warehouse, so your purchasing team sees available stock and what is already on its way.

The Production module connects recipes, assemblies and routings with the warehouse and accounting, so the consumption of every production order is recorded against stock. Physical, cycle and full inventories are recorded on the same platform, and reports can be viewed on screen, printed or exported to Excel. Everything runs on our own servers, in a data center.

Frequently asked questions

How often should the reorder point be recalculated?

As a rule of thumb, whenever a material's consumption, supplier or lead time changes, plus a quarterly review for the highest-consumption materials. Before the year-end close and any peak season, an extra recalculation with the current production schedule is worthwhile.

Does the reorder point work for raw materials that depend on the production schedule?

It works as a safety net. For those materials, the main reference is the requirement that comes from scheduled orders and the bill of materials. The reorder point works best for materials with stable consumption, such as packaging, consumables, spare parts and components shared by several products.

What should I do if a material is already below its reorder point?

Check the inventory position first: if an order in transit will arrive in time, following up is enough. If there is none, issue the order right away, confirm the date with the supplier and tell production how many days the available stock covers.

If the moment to order material in your plant depends on the rack looking empty, the shortage is discovered on the line, where every hour of downtime costs more. At Oasys we integrate ERP, WMS, TMS and Production on a single platform, on our own servers, so your purchasing team decides with real-time available stock, orders in transit and the consumption of every production order. Find out how.