Reorder Point System
The reorder point ("ROP") is the level of inventory when an order should be attained with suppliers to bring the inventory up by the Economic order quantity (EOQ)
Continuous Review System
The reorder point for replenishment of stock comes about when the level of inventory drops down to zero. In view of instant replacement of stock the level of inventory jumps to the original level from zero level.
In real life states of affairs, one never meets a zero lead time. There is always a time lag is falling behind from the date of putting an order for material and the date on which materials are obtained. As a result the reorder point is always higher than zero, and if the company places the order when the inventory r each ones the reorder point, the new goods will arrive before the company runs out of goods to sell. The decision on how much stock to hold is in general denoted to as the order point problem, that is, how low should the inventory be depleted before it is reordered.
The two elements that ascertain the appropriate order point are the delivery time stock which is the Inventory requisite during the lead time (i.e., the difference among the order date and the receipt of the inventory ordered) and the safety stock which is the minimum level of inventory that is applied as a protection against shortfalls due to variations in demand.
Thus,
Reorder Point = Normal consumption during lead-time + Safety Stock
Several elements ascertain how much delivery time stock and safety stock should be held. In brief, the efficiency of a replenishment system affects how much delivery time is requisite. Since the delivery time stock is the expected inventory usage among ordering and getting inventory, efficient replenishment of inventory would reduce the need for delivery time stock. And the determination of level of safety stock requires a introductory trade-off among the risk of stock out, resulting in possible investor discontent and disoriented sales with the increased costs linked with carrying additional inventory.
Another method of calculating reorder level requires the calculation of usage rate per day, lead time which is the amount of time among placing an order and getting the goods and the safety stock level expressed in terms of several days' sales.
Reorder level = Average daily usage rate x lead-time in days
From the above formula it can be easily deduced that an order for replenishment of materials be attained when the level of inventory is just enough to cope with the needs of production during lead time.
For example:
If the average daily usage rate of a material is 70 units and the lead-time is seven days, then:
Reorder level = Average daily usage rate x Lead time in days = 70 units x 7 days = 490 units
When the inventory level r each ones 350 units an order should be placed for material. By the time the inventory level r each ones zero towards the end of the seventh day from placing the order materials will r each one and there is no ca employ for concern.
Re-order point = Average Lead Time*Average Demand + Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead Time^2)
Reorder point = S x L + J ( S x R x L) Where
ñ S = Usage in units per day
ñ L = Lead time in days
ñ R = Average number of units per order
ñ J = Stock out acceptance factor
ñ The stock-out acceptance factor, 'J', depends on the stock-out percentage rate specified and the probability distribution of usage (which is assumed to follow a Poisson distribution)
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