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6.4 Reorder Point: Determining When to Order

Now that we have decided how much to order, we look at the second inventory question: when to order. The time between placing and receiving an order, called the lead time or delivery time, is often a few days or even a few weeks. Inventory must be available to meet the demand during this time, and this inventory can either be on hand now or on order but not yet received. The total of these is called the inventory position. Thus, the when to order decision is usually expressed in terms of a reorder point (ROP), the inventory position at which an order should be placed. The ROP is given as

\begin{array}{l} ROP & = & (Demand per day) \times (Lead time for a new order in days) \\ = & d \times L \end{array}

$\begin{array}{l} ROP & = & (Demand per day) \times (Lead time for a new order in days) \\ = & d \times L \end{array}$ (6-8)

Figure 6.4 has two graphs showing the ROP. One of these has a relatively small lead time, while the other has a relatively large lead time. When the inventory position reaches the ROP, a new order should be placed. While waiting for that order to arrive, the demand will be met either with inventory currently on hand or with inventory that already has been ordered but will arrive when the on-hand inventory falls to zero. Let’s look at an example.

A pair of reorder point graphs, one where ROP is less than Q and one where ROP is greater than Q. — Figure 6.4 Reorder Point Graphs

Figure 6.4 Full Alternative Text

Procomp’s Computer Chip Example

Procomp’s demand for computer chips is 8,000 per year. The firm has a daily demand of 40 units, and the order quantity is 400 units. Delivery of an order takes three working days. The reorder point for chips is calculated as follows:

\begin{array}{l} ROP & = & d \times L = 40 units per day \times 3 days \\ = & 120 units \end{array}

$\begin{array}{l} ROP & = & d \times L = 40 units per day \times 3 days \\ = & 120 units \end{array}$

Hence, when the inventory stock of chips drops to 120, an order should be placed. The order will arrive three days later, just as the firm’s stock is depleted to 0. Since the order quantity is 400 units, the ROP is simply the on-hand inventory. This is the situation in the first graph in Figure 6.4.

Suppose the lead time for Procomp Computer Chips was 12 days instead of 3 days. The reorder point would be

\begin{array}{l} ROP & = & 40 units per day \times 12 days \\ = & 480 units \end{array}

$\begin{array}{l} ROP & = & 40 units per day \times 12 days \\ = & 480 units \end{array}$

Since the maximum on-hand inventory level is the order quantity of 400, an inventory position of 480 would be

\begin{array}{l} Inventory position & = & (Inventory on hand) + (Inventory on order) \\ 480 & = & 80 + 400 \end{array}

$\begin{array}{l} Inventory position & = & (Inventory on hand) + (Inventory on order) \\ 480 & = & 80 + 400 \end{array}$

Thus, a new order would have to be placed when the on-hand inventory fell to 80 while there was one other order in-transit. The second graph in Figure 6.4 illustrates this type of situation.

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Table of Contents for 6.4 Reorder Point: Determining When to Order

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Table of Contents for
6.4 Reorder Point: Determining When to Order