Production is making or manufacturing different products required by the consumers with the available raw materials. The raw materials can also be purchased and are done so in bulk quantities.
Since the same raw materials would be required throughout the production of the item, there were particular terms for it. The terms that deal with the ordering and reordering of these raw materials are: reorder level and reorder quantity. So what is the difference between them?
Reorder Level vs Reorder Quantity
The main difference between Reorder Level and Reorder Quantity is that reorder level means the stock level of and product’s inventory. Reorder quantity is the magnitude of the materials that are to be ordered in the purchase list.
Reorder level is the list that keeps account of the materials and products in a company. This decides when the order of new stock materials needs to be placed. It is a strategic decision as it requires to know if new material is required.
Reorder quantity is the amount that is to be ordered in the purchase list for the new inventory. This decided how much of the new stock or material was required and it is a tactical decision.
Comparison Table Between Reorder Level and Reorder Quantity
| Parameters of Comparison | Reorder Level | Reorder Quantity |
| Meaning | It is the stock level of a particular inventory in the company whose order needs to be placed for a fresh supply. | Quantity or the magnitude of the materials that are to be ordered in the purchase list for the new inventory. |
| Nature | Decides if and when the order of new stock materials needs to be placed. | Decided how many or the quantity of the new stock materials that are to be purchased in the order. |
| Decision type | Strategic decision | Tactical decision |
| Main external factors | The lead time-taken to supply the products | Cost of freight and big order discounts |
| Risk factors | Out of stock or disruption in the unit during production. | The high cost of the unit or not giving the appropriate pricing to the final production unit. |
| Stability | Is stable with little to no changes | It is very unstable as they can vary for each order. |
What is the Reorder Level?
Reorder level is the level of stock in a company that keeps the list of the required and existing materials for the inventories. It decides whether a new order needs to be placed and if so, when?
The internal factors that affect this are the maximum usage of the product during lead time. The external factors is the lead time-taken to supply products to the production unit.
The formula for calculating reorder level is:
(average daily usage rate) x (lead time delay)
The main risk factors include the material being out of stock or if any disruption occurs in the unit during production. Otherwise, it is very stable.
What is the Reorder Quantity?
Reorder quantity is the amount of raw material that needs to be added to the purchase list for the new inventory. The decision of how many units need to be ordered is taken care of by the reorder quantity formula.
The formula for reorder quantity is:
Square root (2 x quantity x loss per order/carry lost per order)
The internal factors affecting reorder quantity is the delivery cost for the order and the cost per unit. It also depends on external factors like the cost of freight and big order discounts.
The main risks included are the high cost of one unit and the company being in lost. The order is also very unstable.
Main Differences Between Reorder Level and Reorder Quantity
- Reorder level refers to the stock level if a particular inventory in the company whose order needs to be placed for fresh supplies. While reorder quantity maintains the magnitude or amount of the materials that are to be ordered in the purchase list for the new inventory.
- The reorder level decides when the order for the new material stocks has to be placed whereas reorder quantity decides the amount or quantity if the new stock that is to be placed an order for.
- Reorder level is a strategic type of decision as it involves knowing whether new stock material is required now or not. On the other hand, reorder quantity is a tactical decision that is made after the reorder level as it decides the amount of stock.
- The main external risks of reorder level include the lead time taken to deliver the materials needed for the new inventory. Whereas, the main external risk for reorder quantity is the cost of freight and the big order discounts.
- For the reorder level, the risks involve the materials being out of stock when ordered or that there is a disruption in the unit during production. For reorder quantity, it is the high cost of one unit and the loss they could face because of it.
- Reorder level is very stable as it sees little to no change in the order. Whereas, reorder quantity is unstable since the number of materials required can change for every order.
Conclusion
Production, by definition, is manufacturing or making something that is required or requested by consumers using available and purchased raw materials. Reorder level and reorder quantity deal with this purchase.
Reorder level maintains the level of stocks of the inventories of the company. It decides when the order for raw materials needs to placed and is very stable. This is because there is little to no change in the order that is being placed.
Reorder quantity is the number of raw materials for which the order needs to be placed. As the definition suggests, it decides how much material is required and needs to be ordered. They are usually unstable since the magnitude of the materials required can change for every order.
Reorder level and reorder quantity are different that reorder level is a strategic decision type since it is very stable whereas reorder quantity is a tactical decision since it has to tactically analyze the quantity required while it being beneficial for them.
References
- https://orsociety.tandfonline.com/doi/abs/10.1057/palgrave.jors.2600933
- https://www.tandfonline.com/doi/abs/10.1080/00207547808929995