Reorder Point and Inventory Management

Overview

The lecture today covered the topic of Reorder Point (ROP) as part of inventory management, explaining how to calculate it under certainty and uncertainty conditions, with clarification of the formulas and calculation of safety stock.

Inventory Management and Purchase Decisions

• Inventory management requires making two decisions: how much to order and when to order.
• The order quantity was previously covered using models like EOQ; today the focus is on order timing using ROP.
• Inventory is the quantity stored in the warehouse to cover demand during a certain period.

Reorder Point (ROP)

• ROP means the reorder point: the moment at which a new order should be placed to avoid stockout.
• Orders are not placed when inventory reaches zero but when it reaches a specific level (ROP).
• The ROP level depends on the daily demand rate and lead time.
• The formula for calculating ROP under certainty: ROP = Daily Demand × Lead Time.

Certainty and Uncertainty Cases in ROP

• Under certainty: demand and lead time are fixed, ROP = Daily Demand × Lead Time.
• Under uncertainty: demand or lead time or both are variable, and safety stock is added to protect against shortages.
• The three cases of uncertainty:
  1. Demand variable and lead time fixed.
  2. Demand fixed and lead time variable.
  3. Both demand and lead time variable.
• In all cases: ROP = expected demand during lead time + safety stock.

Calculating Safety Stock and Z-Value

• Safety stock is calculated based on the degree of variability in demand and lead time.
• Z-Value is used, calculated based on the service level through standard normal distribution tables.
• The higher the safety stock, the lower the risk of stock-out and the higher the service level.

Steps to Solve ROP Problems

• Determine if demand and lead time are fixed or variable based on the data.
• Extract data: demand rate, lead time, standard deviation, service level.
• Choose the appropriate formula according to the type of variables (from the three models).
• Calculate ROP and safety stock using the appropriate formulas.
• Determine the Z-Value from the normal distribution table based on the required service level.

Key Terms & Definitions

• ROP (Reorder Point) — the reorder point, the inventory quantity at which a new purchase order is issued.
• Lead Time — the lead time, the duration between placing the order and receiving the goods.
• Daily Demand — the daily consumption rate of inventory.
• Safety Stock — additional stock to cover variability in demand or delays in supply.
• Service Level — the service level, the percentage of orders that can be fulfilled without stockout.
• Stock-out — the state of inventory depletion or inability to meet demand.

Action Items / Next Steps

• Review examples and exercises on calculating ROP under certainty and uncertainty.
• Apply formulas to real problems with extracting values from the standard normal distribution table.
• Memorize the three formulas for calculating ROP and identify the appropriate case for each formula.