Reorder Point (ROP) Optimization#
Setting the stock level at which to reorder to avoid stockouts.
Important
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What it is#
The reorder point is the inventory level that triggers a new order — set so stock arrives just before you run out. Under a continuous-review policy, when on-hand inventory falls to the ROP, a replenishment order is placed.
The formula#
where \(\mu_D\) is average demand per period and \(L\) is the lead time. The first term covers expected usage while the order is in transit; the second buffers variability.
Optimizing it#
A good ROP balances stockout risk against holding cost. It is tuned with accurate demand forecasts, measured demand and lead-time variability, and a chosen service level; modern systems recompute it in real time as those inputs drift. Drop the safety-stock term only when demand is very stable and suppliers are reliable.
Theme: Operations & Supply Chain · All terminology
Hint
Mind map — connected ideas
Safety Stock · Demand Forecasting · Long Lead Times · Fill Rate · Stockout Rate · Supplier Management
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More in Operations & Supply Chain
Backorder Rate · Crew Overtime · Demand Forecasting · Fill Rate · Long Lead Times · Long-Tail Items · Lost Sales Value · Overstock % · Real-Time Inventory Tracking · Safety Stock · SKU · Slow-Moving SKUs · Stockout Rate · Stockouts
See also
Source article Adapted (context, re-expressed) in our own words from: Reorder Point (ROP) Optimization (insightful-data-lab.com).