Page 101 - F2 - MA Integrated Workbook STUDENT 2018-19

Accounting for materials

Systems of inventory control

3.1 Re-order level

This level will be determined with reference to the time it will take to receive an order
and the possible inventory requirements during that time. When this level of
inventory is reached a new order must be placed to prevent stock outs.

Re-order level = maximum usage × maximum lead time

Re-order level = (maximum usage × maximum lead time) + buffer

Example 1

A business uses 5,000 units of raw material per week and it takes 3 weeks to
receive the goods after the order has been placed. The business also keeps
additional inventory of 2,500 units in reserve.

Calculate the re-order level.

5,000 units × 3 weeks + 2,500 buffer inventory = 17,500 units

Test your understanding 2

The demand for a particular product is expected to vary between 10 and 50
units per day. Lead time is, on average, 5 days, although it has been as short
as 3 days and as long as 10 days. The company orders 1,500 units a time.
The company operates a 300-day year.

Calculate the re-order level

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