Determining Order Point Problem
The EOQ technique determines the size of an order to acquire inventory so as to minimize the carrying as well as the ordering costs. In other words, the EOQ provides an answer to the question : how much inventory should be ordered in one lot ? Another important question pertaining to efficient inventory management is : when should the order to procure inventory be placed ? This aspect of inventory management is covered under the order point problem.
The re-order point is stated in terms of the level of inventory at which an order should be placed for replenishing the current stock of inventory. In other words, re-order Point be defined as that level of inventory when fresh order should be placed with the suppliers for procuring additional inventory equal to the economic order quantity. We can use the following formulae to calculate the re-order point.
The re-order point = Lead time in days average daily usage of inventory.
It is based on the following assumptions:
- Constant daily usage of inventory
- Fixed lead time
The term lead time refers to the time normally taken in receiving the delivery of inventory after placing orders with the suppliers. It covers the time span from the point when a decision to place an order for the procurement of inventory is made to the actual receipt of the inventory by the firm. Another way of saying it is that the lead time consists of the number of days required by the suppliers to receive and process the order as well as the number of days during which the goods will be in transit from the supplier. The lead time may also be called as the procurement time of inventory.