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Inventory Control and Reorder Levels Guide

This document discusses an inventory control model and reorder level calculations. It provides the formulas for reorder point (ROP), economic order quantity (EOQ), buffer stock, and reorder level. An example is also given calculating EOQ, number of orders per year, buffer stock, reorder level, and carrying costs given annual usage, ordering costs, unit cost, lead time, and daily usage information. The optimal order quantity, number of orders per year, buffer stock, reorder level, and carrying costs are determined for the given values.

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47 views5 pages

Inventory Control and Reorder Levels Guide

This document discusses an inventory control model and reorder level calculations. It provides the formulas for reorder point (ROP), economic order quantity (EOQ), buffer stock, and reorder level. An example is also given calculating EOQ, number of orders per year, buffer stock, reorder level, and carrying costs given annual usage, ordering costs, unit cost, lead time, and daily usage information. The optimal order quantity, number of orders per year, buffer stock, reorder level, and carrying costs are determined for the given values.

Uploaded by

few.fearless
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© © All Rights Reserved
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Inventory Control Model

Reorder level: when to order.

The time between the placement and receipt of an order,


called the lead time.

The reorder point (ROP) is :


ROP = (Demand per day) x (Lead time)
= d x LT
This equation for ROP assumes that demand is uniform and
constant and no safety stock is necessary.

d = D / (Number of working days in a year)


Example:

Let Annual demand (D) = 1000 units


Average daily demand (d) = 1000/321
Lead time (LT) = 5 days
Ordering cost (s)= $ 5 per order
Holding cost (h) = $ 1.25 per unit per day

The optimal order quantity (Q*) = √(2DS)/H =89.4 unit

R = d x LT =( 1000/321) x 5 = 15.5 units


Buffer stock = Average demand x Average lead time

Example :

Demand rate is 100 units/month, the normal and


maximum lead time are 10 days and 30 days respectively,

BS= (100/30) x (10+30)/2

When no stock out is desired

Buffer stock = (Maximum demand during LT)


– (Average demand during LT)
= Dmax x LT – Davg x LT
= (Dmax - Davg) x LT

Reorder level = Davg x LT + BS


Problem
The following information is provided for an item:
Annual usage = 12,000 units, ordering costs = $ 60 per order,
Carrying cost 10%, unit cost of item = $ 10 and
lead time = 10 days.

There are 300 working days in a year. Determine the EOQ and
the number of order per year. In the past two years the use rate
gone to 70 units per day. For a reordering system base in the
inventory level, What should be the reorder level at this buffer
stock? What should be the carrying costs for a year?

Find EOQ.= 1,200 units

No of orders / year = 12,000/1200 = 10


Average usage per day = 12,000/300 = 40 unit
Max usage = 70 unit/day
buffer stock = (70 - 40) x LT= 30 x 10 =300 unit
ROL = Average lead time demand + buffer stock
= 40 x 10 + 300 = 700 unit
Average inventory level = buffer stock + Q* /2
= 300+ 1200/2 = 900 unit
Inventory carrying cost = 900 x ( $ 1) =$ 900

Inventory Control System:

Fixed order Quantities System (Q – System):


In this system of ordering there are three parameter of items
a) EOQ
b) Optimal buffer stock
c) ROL

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