Explain Re-Order Level (ROL).
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The Reorder Level (ROL), also known as the reorder point, is a critical inventory management parameter that signifies the minimum inventory level at which a new order should be placed to replenish stock before it falls below the required level. It helps ensure that there is sufficient inventory on hand to meet demand during the lead time, which is the time it takes for the replenishment order to be delivered.
The Reorder Level is determined based on several factors:
Demand Rate: The demand rate, also known as the usage rate or consumption rate, represents the rate at which inventory is consumed or sold during a specific time period. It is typically measured in units per time period (e.g., units per day, week, or month) and is derived from historical sales data, demand forecasts, or average usage rates.
Lead Time: The lead time is the duration between placing a replenishment order and receiving the ordered inventory. It includes the time taken for order processing, shipping, and delivery. Lead time variability may also be considered in the calculation of the Reorder Level to account for uncertainties in delivery times.
Safety Stock: Safety stock is a buffer inventory maintained to protect against uncertainties in demand, lead time variability, and supply chain disruptions. It provides a cushion to absorb unexpected fluctuations and ensure that there is enough inventory available to prevent stockouts. The level of safety stock is determined based on factors such as demand variability, service level targets, and desired risk tolerance.
The Reorder Level is calculated as follows:
Reorder Level (ROL) = (Demand Rate * Lead Time) + Safety Stock
When the inventory level drops to or below the Reorder Level, it signals the need to place a replenishment order to restock inventory and avoid stockouts. By setting an appropriate Reorder Level and safety stock level, businesses can ensure that they have enough inventory on hand to meet customer demand while minimizing the risk of stockouts and disruptions in the supply chain.