Difference Between Reorder Level and Reorder Quantity

The reorder level is the level of the stock of a particular item, held by the firm, when an order is needed to be placed for avoiding the risk of being out of stock. It is based on the average time taken by the supplier for replenishment, maximum usage of the item during the replenishment time, and safety stock requirement. It is also known as reorder point.

The reorder quantity is the quantity of the order that is to be placed on a new purchase order for the particular item. The ordered quantity or the number of units needs to be optimum taking into account the various factors like cost of order, cost of transportation, carrying costs, etc. The reorder quantity is the quantity which, given the normal usage, provides the best balance between the various factors like quantity discounts, freight, storage costs, and working capital requirements. 

The formula for reorder level is:

Reorder level = (average daily usage rate x average lead time in days) + safety level

The formula for reorder quantity is:

Reorder quantity = SQRT(2 × quantity required × cost per order/ carrying cost per unit) 

The main differences between Reorder Level and Reorder Quantity are as under:

• Reorder level is the stock level of a particular item of inventory, at which a firm needs to place an order for the fresh supply or replenishment of the item; whereas reorder quantity is the magnitude or the number of units to be ordered in a new purchase order for the fresh supply of a particular inventory item.
• While reorder level gives a signal regarding when to place a new order for the fresh supply of an inventory item; reorder quantity makes obvious the size of a particular order.
• The reorder level acts as a trigger or indication for placing the order for an item; whereas reorder quantity is the actual act of calculating and placing the size on a new purchase order.
• While in reorder level, the main element is time; in case of reorder quantity, the main element is quantity or number of units.
• While reorder level provides an answer to the question ‘when’; reorder quantity provides an answer to the question ‘how much’.
• While the internal factors involved in reorder level are maximum usage during the lead time, safety level, and replenishment period; the internal factors involved in reorder quantity are carrying cost of inventory per unit, cost of order, etc.
• Whereas the external factor involved in reorder level is lead time taken by the supplier; the external factors involved in reorder quantity are cost of freight, and big order quantity discounts.
• Reorder level has first precedence. first of all, we assess whether the stock level of an inventory item is above the reorder level or below it. if the stock level is below the reorder level, it is the trigger to place a purchase order; reorder quantity is calculated to be placed on the new purchase order, only after it has been decided that a purchase order is to be made.
• While reorder level is a strategic decision; reorder quantity is a tactical decision.
• Reorder level is a policy level or higher management level decision variable; whereas reorder quantity is an operational level and routine decision.
• While reorder level is not only an inventory management, but also business continuity issue; reorder quantity is purely an inventory management issue.
• Reorder level decision is more stable; whereas reorder quantity decision is less stable with more frequent changes.
• The main risk factor in reorder level is being out of stock; whereas the main risk factor in reorder quantity is high cost per unit of the inventory item ordered.
• The other risk factors in reorder level are disruption in production and foregone sales; whereas the other risk factors in reorder quantity are being uncompetitive in pricing of the final product or service offering, and reduction in profit margin per unit in case of higher costs of the inputs.
  

Tabular Comparison of Reorder Level and Reorder Quantity 

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