Reordering point

Reordering point

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  Hemwati Nandan BahugunaGharhwal University, Srinagar (A Central University) Centre for Mountain Tourism & Hospitality Sutdies M.B.A. (Tourism) IIInd sem Batch (2013-15) Subject:REORDERING POINT Submitted to Submitted by Dr. RAKESH Dhodi SAURAV RAWAT
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  REORDERING POINT SUBMITTEDBY SAURAV RAWAT
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  The reorder point("ROP") is the level of inventory which triggers an action to replenish that particular inventory stock. It is normally calculated as the forecast usage during the replenishment lead time plus safety stock. In the EOQ (Economic Order Quantity) model, it was assumed that there is no time lag between ordering and procuring of materials. Therefore the reorder point for replenishing the stocks occurs at that level when the inventory level drops to zero and because instant delivery by suppliers, the stock level bounce back.
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  Reorder point isa technique to determine when to order; it does not address how much to order when an order is made.
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  • The reorderpoint can be different for every item of inventory, since every item may have a different usage rate, and may require differing amounts of time to receive a replenishment delivery from a supplier. • For example, a company can elect to buy the same part from two different suppliers; if one supplier requires one day to deliver an order and the other supplier requires three days, then the company's reorder point for the first supplier would be when there is one day's supply left on hand, or three days' supply for the second supplier.
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  • Predicting anoptimal amount of stock for varying costumer demands is a critical component in balancing an operation’s inventory system. Your inventory system should act as a reserve of products to meet your sales needs, while minimizing the amount of cash you have tied up in inventory. • One of the most widely accepted methods used for effective inventory management is the reorder point formula, a standardized formula that triggers the system the instant your inventory drops to the reorder point and places an order before you hit a stockout.
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  The basic formulafor the reorder point is to multiply the average daily usage rate for an inventory item by the lead time in days to replenish it. • Reorder Point = Normal consumption during lead-time + Safety Stock • (average period demand)*Lead Time periods •
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  • To guardagainst the later condition, a company may alter the reorder formula to add a safety stock, so that the formula becomes: • (Average daily usage rate x Lead time) + Safety stock • This formula alteration means that replenishment stock will be ordered sooner, which greatly reduces the risk that there will be a stockout condition.
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  GOAL • Thegoal in ordering is to place an order when the amount of inventory on hand is sufficient to satisfy demand during the time it takes to receive that order (i.e., lead time). There are four determinants of the reorder point quantity: • The rate of demand (usually based on a forecast). • The lead time. • The extent of demand and/or lead time variability. • The degree of stockout risk acceptable to management.
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  Conclusion • Implementationof the reorder formula has worked in a variety of business environments. It’s a cost-saving method that can help prevent stockouts, missed opportunities in sales, and a possible interruption in your operational process.
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  • In reallife situations one never encounters a zero lead time. There is always a time lag from the date of placing an order for material and the date on which materials are received. As a result the reorder point is always higher than zero, and if the firm places the order when the inventory reaches the reorder point, the new goods will arrive before the firm runs out of goods to sell. The decision on how much stock to hold is generally referred to as the order point problem, that is, how low should the inventory be depleted before it is reordered. • The two factors that determine the appropriate order point are the delivery time stock which is the Inventory needed during the lead time (i.e., the difference between the order date and the receipt of the inventory ordered) and the safety stock which is the minimum level of inventory that is held as a protection against shortages due to fluctuations in demand.
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  • Several factorsdetermine how much delivery time stock and safety stock should be held. In summary, the efficiency of a replenishment system affects how much delivery time is needed. Since the delivery time stock is the expected inventory usage between ordering and receiving inventory, efficient replenishment of inventory would reduce the need for delivery time stock. And the determination of level of safety stock involves a basic trade-off between the risk of stockout, resulting in possible customer dissatisfaction and lost sales, and the increased costs associated with carrying additional inventory. • Another method of calculating reorder level involves the calculation of usage rate per day, lead time which is the amount of time between placing an order and receiving 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
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  • If theaverage daily usage rate of a material is 50 units and the lead-time is seven days, then: • Reorder level = Average daily usage rate x Lead time in days = 50 units per day x 7 days = 350 units • When the inventory level reaches 350 units an order should be placed for material. By the time the inventory level reaches zero towards the end of the seventh day from placing the order materials will reach and there is no cause for concern. • Re-order point = Average Lead Time*Average Demand + Service Level*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead Time^2)