Order Point Problem
The EOQ technique determines the size of the order to acquire inventory so as to carrying as well as the ordering costs. In other words, the EOQ provides an answer to 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 he paid this aspect of inventory management is covered under the reorder point problem.
Thee reorder point is stated in terms of the level of inventory at which an order should be place for replenishing the current stock of inventory. In other words, recorder point may be defined as a level of inventory when fresh order should be placed with the suppliers for procuring addition inventory equal to the economic order quantity. Although some sophisticated reorder point formula are available, they are outside the scope of this books have, therefore, used a simple formula to calculate the reorder point. It is based on the following assumptions: (i) constant daily usage of inventory, and (ii) fixed lead time. In other words, the formula assumes conditions as certainty.
The reorder point = Lead time in days x average daily usage of inventory. The term lead time refers to the time normally taken in receiving the delivery after orders with the suppliers. It covers the time span from the point when a decision to plant the order for the procurement of inventory is made to the actual receipt of the inventory by the fim. Another way of saying it is that the lead time, of the number of days required by suppliers to receive and process the order as well as the number of days during which the good will be in transit from the supplier. The lead time may also be called as the procurement time inventory.
The average usage means the quantity of inventory consumed daily. We call, therefore, define reorder point as the equal to the consumption during the lead time. The average consumption (daily) of inventory of a firm is 1000 units. The number of days required to receive the delivery of inventory after placing order (i.e. processing and transit time) is 15 days. The reorder point = (15000 units) units. The implication is that the firm should place an order for replcache the inventory coming soon is the level reaches 15,000 units. The size of the order would obviously be equal to the EOQ.