ASSIGNMENT NO.

05
NAME :- PARUL AGARWAL.
ROLL NO:- 194
1.EXPLAIN CYCLE INVENTORY AND ROP.?
-CYCLE INVENTORY:-
A method of keeping track of inventory by performing inventory counts
constantly, or on a frequent and regular basis, instead of once per year or
once per quarter. A business using the cycle inventory method might count
different items at different rates, based on the level of turnover or demand
for that particular item.It is also called as cycle stock.

ROLE OF CYCLE INVENTORY:-

- Lot, or batch size: quantity that a supply chain.

-Stage either produces or orders at a given time.

- Cycle inventory is held primarily to take advantage of economies of

scale in the supply chain and reduce cost within a supply chain.

-Volume-based discounts are compatible with small lots that reduce cycle
inventory.

- The second action does not increase purchases by the customer but
increases the amount of inventory held at the retailer increasing the cycle
inventory and the flow time within the supply chain.

CYCLE INVENTORY= lot size/2.=Q/2.

AVG.FLOW TIME= Avg.Inventory/Avg.flow rate.

Avg.flow time resulting from cycle inventory.

Cycle inventory/demand=Q/2D.
CALCULATION:-
-EOQ(Economic Order Quantity)
√[(2 x D x S)/(C x I)]
WHERE ,D = annual demand of 1500 units,
S = fixed cost per order of $.10,
C = unit cost of $22 each and storage costs of 0.02 to set up the
calculation with your actual figures:-

√[(2 x 1500 x .10)/(22 x.02 )] or

√[(3000 x .10)/(.44 )] or
√[(300)/(.44 )] or
√681.8, which is 26.1
Dividing 26.1, the EOQ by 2 gives you 13 units, the most cost-effective
number of units to order at one time, according to the inventory cycle stock
calculation.
-ROP(REORDERING POINT):-
The reorder point (ROP) is the level of inventory which triggers an action
to replenish that particular inventory stock. It is a minimum amount of an
item which a firm holds in stock, such that, when stock falls to this amount,
the item must be reordered.

CALCULATE:-
To find lead time demand, you simply multiply the lead time by your
average daily sales. Lead time is the amount of time it takes from
the point you request an order from your supplier and when it arrives in
your warehouse.

Reorder Point.= Lead Time Demand( Average Lead time x Average

usage) + Safety Stock.

where:
  Average Lead Time is the average number of days it takes between the
moment an order is placed and when the inventory is actually received
from the supplier and made available for consumption.
 Average Usage is the average rate of consumption of inventory per day
 Safety Stock is the additional inventory necessary to reduce the risk of a
stockout in case of a delay in the order delivery (i.e. due to higher than
average lead time) or a higher than average inventory usage.
EXPLANATION:-

Unlike EOQ which is concerned with how much of inventory is to be ordered,

the reorder point determines when the order for inventory is to be placed.

ROP is essentially the normal consumption of inventory during average lead

time plus some safety stock if the lead time or inventory usage are variable.

If lead time and inventory usage are constant there will be no stock-outs and
hence no need for maintaining a safety stock to guard against the risk. In such
cases, ROP is simply calculated as:

Reorder Point = Average Lead time x Average usage

If however either lead time or inventory usage are variable, which is usually
the case, ROP is calculated as follows:

Reorder Point = (Average Lead time x Average usage) + Safety Stock

The degree of variability of lead time and inventory usage will affect the level
of safety stock that will be required to minimize the risk of running out of
inventory.

Example:-
Cars PLC, a car distributor, needs to find when it should place orders for a
specific model of car from its manufacturer. Relevant information is as follows:
Average Sales 20 cars per day
Average Lead Time 50 days
Safety Stock 100 cars
EOQ 2000 cars

Calculate the Reorder Point and comment on your answer.

Reorder Point = (Average Lead Time x Average usage) + Safety Stock
= (50 x 20) + 100
= 1,100 cars
Cars PLC should order 2000 cars from the manufacturer each time its inventory level falls to
1100 cars.

Importance:-

Placing orders at the reorder point ensures that the replacement stock arrives
just in time to ensure that no stock outs take place. ROP also helps to avoid
unnecessary inventory holding costs that may result from placing orders too
early thereby causing inventory to pile up.