Order up to level is when stock levels are periodically reviewed, and an amount of the item is ordered to return stock levels to the target level.
It is a strategy in inventory management that involves ordering up to the optimal inventory level.
The goal of the order-up-to-level is to have just enough inventory on hand but not too much, which can lead to higher costs and lower profits. Ordering less than what’s needed may mean running out of product and disappointing customers, while ordering more than necessary could result in wasted money or even spoilage.
The order-up-to-level is initiated if the inventory level is at or below the reorder point. In inventory control, periodic stock taking and review will help maintain the order up to level.
Order up to level formula
The most straightforward way of calculating it is,
Order-up-to-level quantity = Target level – reorder point.
There are two variations we can find in computing reorder points.
- Reorder Point = Safety Stock + Basic Stock + (Lead Time in days* Unit Sales Per Day ) // If the company maintains safety stock and basic stocks
- Reorder point = Lead Time in days* Unit Sales Per Day ) // If the company doesn’t maintain safety stock and basic stocks.
Hence our computation could be,
- Order up to level quantity = Target level – (Safety Stock + Basic stock +(Lead Time in days* Unit Sales Per Day )).
- Order up to level quantity = Target level – (Lead Time in days* Unit Sales Per Day ).
Supply chain management systems available in the market today are with sophisticated inventory management modules.
Most of the ERP solutions available have an SCM module to manage inventory control. The Thing that needs to be taken care of is the periodic review system.
Order up to level vs. Reorder point
Both order up to level and reorder point are inventory control policies. Minor differences between them are given below.
- In the order up to level, the stock review is periodic. In reorder, point review of the stock is a continuous process.
- In order-up-to-level, the time interval between orders is fixed. At the reorder point, as soon as the stock drops to the reorder point, a new order will be placed without considering the intervals between orders.
- In reorder point policy, order quantity is fixed. But in the order up-to level policy, order quantity varies according to the requirements.
Difference between reorder quantity and order up to level.
- Order up-to level indicates the level at which a new order is placed to reach the stock level to the target level. Re-order quantity means the number of items is to be ordered to fulfill the target level.
- Order up-to level determines when the order has to place and reorder quantity determines how much quantity has to be ordered.
- Order up-to level will be affected by the lead-time taken by the vendor to deliver goods. In addition, reorder quantity will be affected by the shipping cost and discounts.
- Usually, order up-to level is constant with minimum changes, whereas reorder quantity may vary for each order.
How do you calculate reorder level?
We can calculate reorder level by multiplying average demand with lead time and adding safety stock.
That means, Reorder level = (Average demand X Lead time) + Safety stock
To level inventory management, a company will buy as much stock as is necessary for the next period. This strategy helps companies avoid the issue of having too many products on hand and not enough demand from customers.
Ordering up to level also ensures that there are no backorders or shortages in supply if unexpected events occur, such as an unanticipated increase in customer demand.
I hope this article has given you some new insights into managing your inventory more efficiently.