It is a level at which a new order must be placed so that the inventory is renewed before the stock reaches zero level. It is estimated by using the formula Reorder Point = Usage Rate x Lead Time
Example: Suppose a company uses 15 units of an item per day (usage rate, and the order lead time is 10 days, a new order must be placed when the inventory level reaches 150 units (Reorder Point 150 = Usage Rate 15 x Lead Time 10) so that inventory is replenished before a stock out occurs.
