Reorder Level

Additional assumption:

Lead time is known and constant

No need to carrying stock from one cycle to the next

So each order should be scheduled to arrive as existing stock runs

out

Reorder level = demand during lead time = lead time x demand per unit time

ROL = LT x D
Revisit Ex 1: Carpet Sell. Given that product lead time is 5 days. Calculate reorder
level
1 (ROL)

Reorder Level with Longer Lead Time

When lead time is longer than the stock cycle
There is always one order outstanding.
Example:

`
`
`

when it is time to place order B, there is one order, A

outstanding and due to arrive before B.
` The stock on hand plus the outstanding order must be enough
to last until B arrive or equal the lead time demand
`

ROL

Stock on hand
ROL

LT x D

Stock on order

Stock on order

LT x D

Reorder Level with Longer Lead Time

When lead time is very long
Several orders are outstanding at anytime
When lead time is between n and n+1 cycle length

`
`
`

n x T < LT < (n+1) x T

ROL

There are n orders

outstanding

Lead time demand

Stock on order

LT x D

n x Qo

Ex 2
Demand for an item is steady at 1,200 units a year
with an ordering cost of $16 and holding cost of
$0.24 per unit per year. Describe a appropriate
ordering policy if the lead time is constant at
(a)
(b)
(c)

3 months
9 months
18 months

Discussion Questions

What are the benefit of short lead times? How can

these be achieved in practice?

IM 322
Inventory Management
Chapter 4 Models for Known Demand

-6-

Textbook:
Donald Waters, Inventory Control and Management, 2nd
ed

Chapter Outline
Extension of EOQ by relaxing
some assumptions
1.

2.

3.
4.

Discount in the unit cost /

price from suppliers
Increasing cost with higher
quantity
Finish replenishment rate
Back orders

Price Discount from Suppliers

Costs vary with the quantity ordered (Q)

Price Discount from Suppliers

Price discount for higher
quantity orders

P = Unit price of item

Example:
Quantity (Q)

0 - 100
101 - 200
201 or more

Unit Price
$10
$8

TC (P1 = $10 )
TC (P2 = $8 )

Inventory cost ($)

TC (P3 = $6 )

holding cost

$6
Reordering cost
Q(P2 ) = 100 Qopt Q(P3 ) = 200
9

Start

1. Take the next lowest

unit cost

2. Find the lowest point

using EOQ equation

4. Calculate the cost at

the break point

NO

3. Is this point
valid?
YES

5. Calculate the cost at

this valid minimum

6. Compare the costs of

all the points considered

7. Find the lowest cost

and corresponding Q

10

End

Procedure for Finding

Best Order Size

Price Discount from Suppliers:

Finding the lowest valid cost
Case 1: All costs are constant except the unit cost (or
unit price from supplier)
`

Qo will be calculated using EOQ formula

Qo could be either

Qo =

2 RC D
HC

Valid minimum: within the range of valid order quantities for this
particular unit cost

Invalid minimum: falls outside the valid order range for this particular
unit cost
11

Ex 1a: Sweatshirt in Bookstore

The university bookstore purchases sweatshirts with school
logo from a vendor. The vendor sells the sweatshirts to the
store for $38 a piece. The cost to bookstore for placing an
order is $120, and the annual carrying cost is estimated as
$9.5 per unit. 1700 sweatshirts are estimated to be sold
during the year. The vendor has offered the bookstore the
following volume discount:
Order Size

Discount

1-299
300-499
500-799
800 and up

0%
2%
4%
5%

What is an optimal order quantity?

12

Price Discount from Suppliers:

Finding the lowest valid cost

Case 2: All costs are constant except the unit cost (or
unit price from supplier) and holding cost
`

Holding cost can be expressed a

proportion of the unit cost (I)

For each unit cost (UCi), the minimum

point of the cost curve comes with Qoi

Qoi for each curve could be either

`

Valid minimum: within the range of valid

order quantities for this particular unit cost

Invalid minimum: falls outside the valid order

range for this particular unit cost
13

Qo =

Qo i =

2 RC D
HC

2 RC D
I UCi

Ex 1b: Sweatshirt in Bookstore

The university bookstore purchases sweatshirts with school
logo from a vendor. The vendor sells the sweatshirts to the
store for $38 a piece. The cost to bookstore for placing an
order is $120, and the annual carrying cost is 25% of the
cost of sweatshirt. 1700 sweatshirts are estimated to be sold
during the year. The vendor has offered the bookstore the
following volume discount:

14

Order Size

Discount

1-299
300-499
500-799
800 and up

0%
2%
4%
5%

What is an optimal order quantity?

Rising cost with larger quantity

15

Ex 2 Rising delivery cost

Kwok Cheng Ho makes a range of high
quality garden ornaments. On average
day he uses 4 tons of fine grain sand.
This sand costs $20 a ton to buy, and
$1.90 a ton to store for a day.
Deliveries are made by modified lorries that
carry up to 15 tons, and each delivery of
a load or part load costs $200.
Find the cheapest way to ensure
continuous supplies of sand
16

Inventory Level

Finish
replenishment
rate

Production quantity

Demand during
production interval

Imax

Maximum inventory

D
PD
Time

17

Production
and demand
(PT)

Demand
only
(DT)

CASE 1

CASE 3

CASE 3

CASE 3

CASE 1, CASE 2, CASE 3

EX 2