Fixed Order Quantity System (Q-System)
According to this system, inventory is continuously checked and a new order is placed when the level of inventory reaches a certain point, called the reorder point. In this system, the order quantity (Q) is always constant and the order is placed when the level of inventory reaches the reorder point. This system is also referred to as reorder point system. The quantity to be ordered is determined by demand and cost considerations. The pattern followed in ordering inventory according to the fixed order quantity system is shown in Figure.
Figure : Fixed Order Quantity System
The fixed order quantity system assumes that the demand for inventories over a period of time (i.e. the usage rate of materials) is constant and the lead-time for replenishment of inventories is zero (i.e. materials are received immediately after they are ordered). With the passage of time, the level of stock gets steadily depleted until it reaches the point R (reorder point) and then the order is placed for Q units and the stock reaches the initial level.
The assumptions like no lead time, constant product demand, constant price per unit of product, constant ordering or setup costs may not be applicable in real life situations. Thus, to improve the applicability of this system, firms adopt a more practical approach wherein the time between two successive orders is varied to accommodate the changes in demand. For instance, in a FOQ system order quantity is 100 units and the order period is ten days. If the quantity demanded for a particular period becomes 150 units then instead of changing the order quantity the next order period is reduced to five days. The reorder point is determined by estimating the expected usage of inventory during the lead-time plus the safety stock needed. An order is placed for a fixed quantity (Q) as soon as the quantity of an inventory item in stock falls below the predetermined reorder level.
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