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A reorder point is the level at which a specific item found within an inventory should be replenished by way of placing an order with a supplier. Also referred to as ROP, this point of reorder is usually determined using various methods that ensure the item is delivered before it is needed for any purpose. Purchasing agents and supply clerks also typically look closely at the number of units required for each order, effectively maintaining the materials on hand at what is know as the economic order quantity, or EOQ.
Two key factors are involved in setting the reorder point for any product. One has to do with the usage. For example, a manufacturing plant may use several sets of machinery that utilize a specific component. In order to prepare for possible breakdowns of those sets, the decision may be made to keep enough replacement parts on hand to make repairs to at least sixty percent of those machines. Assuming this figure is based on past experience where no more than half the machines required the replacement of the part within a short period of time, setting the reorder point for slightly more protects the business from losses incurred due to a reduction in production time.
Along with usage, setting a reorder point also requires understanding how much time is likely to pass between the placement of the order and its delivery. For routine items that are usually kept in stock, the wait time may be no more than a couple of business days. Should the item in question be somewhat unique, the supplier may require several weeks to produce and ship the number of units requested. In order to minimize the potential for having to curtail operations during that waiting period, the reorder point is set to trigger when there is still a higher quantity of units on hand that can be called upon if needed before the shipment arrives.
Many companies once established the reorder point for various supplies manually. This sometimes involved the use of formulas to determine the average usage over a period of months, and the average delivery time associated with each inventory item. Today, businesses usually make use of inventory software that has the capability to analyze all posting of receipts and distributions of items from the inventory, and adjust each item reorder point as needed. When the software functions efficiently, inventory levels are maintained that ensure there are enough supplies on hand, but also keep the overall value of the inventory as low as possible, a feature that helps to minimize the tax burden of the business.