What is Order Point?

Order Point

It is also known; ‘Ordering Level’; or ‘ Recorder Point’, or ‘Reordering Level or ‘Ordering Limit’, it has been stated earlier that Order Point is at which order for supply of materials or goods is placed. To decide the Order Point, three factors are considered, viz., (1) Lead time (2) Usage during Lead time, and (3) Minimum Limit, or the Safety stock.

In order to ensure that the optimum quantity of material is purchased and stocked, neither less nor more, the storekeeper applies scientific techniques of materials management. Fixing of certain levels for each items of materials is one of such techniques.

The following levels are generally fixed.

1. Maximum level
2. Minimum level
3. Order level
4. Danger level

1. Maximum level

The maximum stock level indicates the maximum quantity of an item of material which can be held in stock at any time.

The maximum stock can be calculated by applying the following formula.

Maximum level – Re-order level + re-order quantity – (minimum consumption X minimum re-order period)

2. Minimum level

Minimum level represents the quantity below which the inventory of any items should not allowed to fall; in other words, an enterprise must maintain minimum quantity of stock so that the production is not hampered due to non-availability of materials. If some buffer inventory is acting as a cushion against reasonable expected maximum usage.

Formula:

Minimum level = Re-order level – (Normal consumption x normal re-order period)

3. Re-ordering Level Point

Re-ordering stock level in relation to an items of stock is the point at which it becomes essential to initiate purchase orders for its fresh supplies. Normally, re-ordering level is a point between the maximum and the minimum levels. Fresh orders must be placed before the actual stocks touch the minimum level.

Reorder level = maximum re-order period x maximum usage.

4. Danger level

The danger level is below the minimum level and represents a stage where immediate steps are taken for getting stock replenished. When the stock reaches danger level it is indicative that if no emergency steps are taken to restock the material, the stores will be completely exhausted and normal production stopped. Generally the danger level of stock is fixed above the minimum level but below the re-ordering level.