The reorder point (ROP) is the level of inventory which triggers an action to replenish that particular inventory stock. It is a minimum amount of an item which a firm holds in stock, such that, when stock falls to this amount, the item must be reordered. It is normally calculated as the forecast usage during the replenishment lead time plus safety stock.
In the EOQ (Economic Order Quantity) model, it was assumed that there is no time lag between ordering and procuring of materials. Therefore the reorder point for replenishing the stocks occurs at that level when the inventory level drops to zero and because instant delivery by suppliers, the stock level bounce back.
The two factors that determine the appropriate order point are the delivery time stock which is the Inventory needed during the lead time (i.e., the difference between the order date and the receipt of the inventory ordered) and the safety stock which is the minimum level of inventory that is held as a protection against shortages due to fluctuations in demand.
Reorder Point = Normal consumption during lead-time + Safety Stock .
Reorder level = Average daily usage rate x Lead time in days = 50 units per day x 7 days = 350 units
Reorder point = S x L + J ( S x R x L)
S = Usage in units per day,
L = Lead time in days,
R = Average number of units per order,
J = Stock out acceptance factor.The stock-out acceptance factor,`J', depends on the stock-out percentage rate specified and the probability distribution of usage (which is assumed to follow a Poisson distribution.))