For a repetitive ordering situation (with reorderpoints), describe the inventory

Question

For a repetitive ordering situation (with reorderpoints), describe the inventory control policy that would prevent shortages while carrying minimal inventory, if fixed ordering costs (S) and quantity discounts were negligible and thus not important factors to consider. In other words: (1) how would you determine the reorderpoint R (high, or low) and the ordering quantity Q (high, or low), and; (2) what impact would your policy have on level of cycle inventory (high, or low) and ordering frequency (frequent, or infrequent)?

Explanation / Answer

For a repetitive ordering situation (with reorderpoints), describe the inventory control policy that would prevent shortages while carrying minimal inventory, if fixed ordering costs (S) and quantity discounts were negligible and thus not important factors to consider. In other words: (1) how would you determine the reorderpoint R (high, or low) and the ordering quantity Q (high, or low), and; (2) what impact would your policy have on level of cycle inventory (high, or low) and ordering frequency (frequent, or infrequent)?

Answer :

In above case its specifically mentioned that fixed ordering costs (S) were negligible.

So if we select the combination of fixed period system & Economic order quantity (EOQ) then we can minimize the inventory & the same time we can minimize the shortage cost .

1) Reorder point=

For calculation of reorder point we will consider EOQ

Q = EOQ = Square root { ( 2 *Annual demand * ordering cost ) / (Unit cost * Inventory carrying cost) }

That will help us to calculate the reorder point.

Also we have to consider Lead time consumption .

Lead time consumption = no of requirement * Lead time period (C * L)

Also we have to consider the safety stock .

So when quantity to reach at level of (C *L) + Safety stock , reorder point is reached.

2) Inventory cycles will be optimum as this is a combination of Fixed period & EOQ. Also the ordering costs will be frequent being fixed period.

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