What does the optimum reorder level specify?

What does the optimum reorder level specify?

• A. How many items should be left in inventory when the next order is placed
• B. The minimum stock level to avoid stockouts
• C. The total annual demand
• D. The average inventory value

Answer: (A)

The question is about the point at which you trigger a replenishment—the stock level that tells you to place a new order. The optimum reorder level specifies how much you should have on hand when you place that order, so that stock can cover demand during the supplier’s lead time and prevent a stockout. In practice this level is typically demand during lead time plus any safety stock to guard against variability. The other ideas described—minimum stock to avoid stockouts, total annual demand, or average inventory value—are different concepts and do not define the reorder point.

The question is about the point at which you trigger a replenishment—the stock level that tells you to place a new order. The optimum reorder level specifies how much you should have on hand when you place that order, so that stock can cover demand during the supplier’s lead time and prevent a stockout. In practice this level is typically demand during lead time plus any safety stock to guard against variability. The other ideas described—minimum stock to avoid stockouts, total annual demand, or average inventory value—are different concepts and do not define the reorder point.