The formulas used in the calculations are:
If you do not keep a safety stock:
\[ \text{Reorder level} = \text{average demand} \times \text{lead time} \]
If you keep a safety stock:
\[ \text{Reorder level} = \text{average demand} \times \text{lead time} + \text{safety stock} \]
A reorder level is the point at which inventory needs to be replenished in order to continue doing business effectively. Calculating this level correctly and effectively can help ensure your company orders exactly the right amount of product at the right time, to maximize revenue and minimize loss through factors such as wastage. Reorder levels are calculated based on a formula that can differ depending on whether a company chooses to maintain a safety stock, or extra product to account for possible shortages between orders.
Let's assume the following:
Calculate the reorder level:
\[ \text{Reorder level} = 20 \times 7 = 140 \text{ shirts} \]
Therefore, the retailer knows to place an order when they have 140 shirts in stock because their next order will probably arrive just as they are running out of shirts in stock.