INVENTORY LEVEL FORMULAS

INVENTORY LEVEL FORMULAS

v Reorder Level (In case of certain lead time and constant demand)

Reorder Level = Demand × Lead Time

• Reorder Level is the level of inventory (or quantity of inventory left in store) at which new order of inventory should be placed with the supplier.
• Lead Time is the time frame from the date of ordering the inventory to the date when the order(inventory) is received from supplier.  

v Reorder Level (In case of Uncertain lead time, Uncertain demand and Without Safety Stock)

Reorder Level = Maximum Demand × Maximum Lead Time

v Reorder Level (With Safety Stock)

Reorder Level=(Average Demand ×Average Lead Time)+ Safety Stock

v Safety Inventory/ Buffer Stock/ Safety Stock/ Minimum Inventory Level

         Safety inventory is the minimum inventory level that should be maintained at every       time to avoid any stock out.

Safety Stock=(Max.Demand ×Max.Lead Time)- (Avg.Demand×Avg.Lead Time)

OR

Safety Stock=Reorder Level- (Avg.Demand×Avg.Lead Time)

v Average Inventory

Average Inventory= (Order Size(Q))/2                         (Without Safety Stock)

OR

Average Inventory=(Order Size(Q))/2+ Safety Stock        (If there is Safety Stock)

OR

Average Inventory=(Min.Inventory Level+Max.Inventory Level)/2

v Maximum Inventory Level    

  It is the level of inventory that a company should not exceed. It would not be cost effective to hold inventory above this level. 

Maximum Inventory Level=(Reorder Level+Reorder Quantity)- (Min.Demand×Min.Lead Time)

v Danger Level

 It is the level of inventory that an organization must have at any time.

Danger Level = Normal Daily Usage × Time required to get emergency supplies