Another method of calculating re-order level involves the calculation of usage rate per day, lead time which is the amount of time between placing an order and receiving the goods and the safety stock level expressed in terms of several days’ sales. Therefore, as above:
ROP = Average Daily Usage × Lead Time (in days)
From the formula it can be easily deduced that an order for replenishment of materials needs to be made when the level of inventory is just adequate to meet the needs of production during lead-time. If the average daily usage rate of a material is 50 units and the lead-time is seven days, then:
Re-order Level = 50 ×7
Re-order Level = 350 Units
When the inventory level reaches 350 units an order should be placed for material. By the time the inventory level reaches zero towards the end of the seventh day from placing the order, the new materials will arrive and there is no cause for concern.
