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Reorder Point and Safety Stock Guide

The reorder point is the inventory level at which an order should be placed to bring inventory up to the economic order quantity. It is determined by multiplying the usage rate by the lead time. A stockout occurs when inventory cannot meet a requisition. Safety stock is extra inventory held to hedge against stockouts. It decreases stockout costs but increases carrying costs. The optimum level of safety stock minimizes both costs. Organizations establish an acceptable probability of being out of stock and determine the necessary safety stock to keep stockouts near that level.

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Jaycee Mae Misal
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59 views10 pages

Reorder Point and Safety Stock Guide

The reorder point is the inventory level at which an order should be placed to bring inventory up to the economic order quantity. It is determined by multiplying the usage rate by the lead time. A stockout occurs when inventory cannot meet a requisition. Safety stock is extra inventory held to hedge against stockouts. It decreases stockout costs but increases carrying costs. The optimum level of safety stock minimizes both costs. Organizations establish an acceptable probability of being out of stock and determine the necessary safety stock to keep stockouts near that level.

Uploaded by

Jaycee Mae Misal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

PART 4

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5/9/12

REODER POINT
Thereorder point(ROP)

is the level ofinventorywhen an order should be made with suppliers to bring the inventory up by theEconomic order quantity(EOQ). 5/9/12

Cont.
It reflects the two variables:

1.) rate of use and 2.) lead time.


To determine the

unadjusted reorder point, multiply usage (number of 5/9/12

Lead Time
The amount of time

between the placing of an order and the receipt of the goods ordered.

5/9/12

Stock Outs
When a manufacturers

stores department cannot fill a requisition for an item which is normally on hand, a stockout occurs.

5/9/12

DETERMINING SAFETY STOCKS WHENstock refers to extra OUT-OFSafety STOCK COST a hedge, inventory held as IS or protection, KNOWN against the
possibility of a stockout.
5/9/12

Effects of Safety Stock


It will decrease the costs of

stockouts,
But it will increase carrying

costs.

5/9/12

Optimum Safety Stock


To minimize the costs of

stockout
At the same time, to

minimize carrying costs on the safety stock.


5/9/12

Service-level Policy
Organizations simply

establish the probability of being out of stock they are willing to live with; then they take whatever safety stock action is required to keep the probability of being out of stock at or near this 5/9/12 point.

DETERMINING SAFETY STOCK REQUIRED FOR ANY DESIRED SERVICE Cost of changing the LEVEL service level
Reordering and safety stock

in practice (two standard approaches)


Relationship between

reorder point and EOQ

5/9/12

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