Economic Order Quantity:

Assume an economic order quantity case where annual demand D = 500 units, economic order quantity Q = 100 units, the wanted probability of not stocking out P = 0.95, the standard deviation of demand during lead time σ _L = 20 units, and Lead time L = 12 days. Discover the reorder point. Suppose that demand is over a 250 = workday year.

Solution

d' in above example is

 d = 500 /250 = 2   and lead time is 12 days.

 From the equation,

R = d'L + z σ_L  = 2 (12) + z (20)

Since, in this case z is 1.64. Substituting this value of z, we achieved

R = 2 (12) + 1.64 (20) = 24 + 32.8 = 56.8 units

This illustrated that when the stock on hand gets down to 56 units, order 100 more.