Reorder Point

A predetermined minimum
level that triggers the order
of a fixed quantity of the
product

 Re-Order

Point=Normal consumption
during lead-time + Safety Stock

Selecting the Reorder Point

with Constant Demand and
Lead Time
Inventory
Position

On-hand
Inventory
R

Order
Placed

Time

OH = ON HAND
SR=SOURCE REGISTER
IP= INVENTORY POSITION
OH=ON HAND
BO=BACK ORDER

Practice Problem with

Constant Demand and Lead
Time
Demand

for water bottles from a

particular concession stand is always 30
per day and the lead time is always 2
days. The on hand inventory is currently 15
bottles, and there is an incoming order of
50 water bottles. If there are currently no
backorders, what is the inventory
position? Should a new order be placed?

Solution
R = Total demand during lead time = 30*2 =
60 bottles
IP = OH + SR BO
= 15 + 50 0 = 65 bottles
65 > 60 so a new order is NOT needed

Selecting Reorder Point with

Variable Demand and
Constant Lead Time
Demand

is not usually constant and

predictable
To guard against stock-outs, reorders that
include safety stock should be selected
Reorder Point = Avg. demand during lead
time + Safety stock

Safety Stock and Reorder

Point
Without

With

safety stock:

safety stock:

Safety Stock Example

Daily demand = 20 units
Lead time = 10 days
S.D. of lead time demand = 50
units
Service level = 90%
Determine:

1.
2.

Safety stock
Reorder point

Safety Stock Solution

Step 1 determine z
From appendix B: z =1.28
Step 2 determine safety stock

Step 3 determine reorder point

Reorder Point with Variable

Demand

Reorder Point
Variable Demand and Lead
Time
When

both demand and lead time are

variable:

Practice Problem with

Variable Demand and
Constant Lead Time
The

average weekly demand for water

bottles from a particular concession stand
is 80 bottles per week, and the constant
lead time is 3 weeks. There is a standard
deviation of 10 bottles. If a 95% service
level is desired, what would the safety
stock and reorder point be?

Solution
d = 80 bottles
d = 10 bottles
L = 3 weeks
dLT = d (L) = 10(3) = 17.32
z = 1.64
Safety stock = zdLT = (1.64)(17.32) = 28.40 or 28 bottles
Reorder Point = dL + safety stock = (80)(3) + 28 = 268
bottles

Selecting Reorder Point with

Variable Demand and Lead
Time
Two assumptions:
Demand and lead time are measured
in the same time units (i.e. days, weeks,
etc.)
Demand and lead time are
independent of one another

Formulas for Variable Demand

and Variable Lead Time
Safety stock = zdLT
R = (Avg. weekly demand x Avg. lead time
in weeks) + safety stock
= dL + safety stock

Practice Problem with

Variable Demand and Lead
Time
The

average weekly demand for water

bottles from a particular concession stand
is 50 bottles per week, with a standard
deviation of 10 bottles. The average lead
time is 2 weeks, with a standard deviation
of 1 week. If an 80% service level is
desired, what would the reorder point be?

Solution
d = 50 bottles
d = 10 bottles
L = 2 weeks
LT = 1 week
dLT = (L2d + d22LT) = [(2)(10)2 + (50)2(1)2] = 51.96
bottles
z = 0.84
Safety stock = zdLT = (0.84)(51.96) = 43.64 or 44 bottles
Reorder point = dL + safety stock = (50)(2) + 44 =144
bottles

Practice problem
Suppose

that the average demand for

bird feeders is 18 units per week with a
standard deviation of 5 units. The lead
time is constant at 2 weeks. Determine the
safety stock and reorder point for a 90
percent cycle-service level. What is the
total cost of the Q system? (t = 1 week; d
= 18 units per week; L = 2 weeks)
Demand distribution for lead time must be
developed:

Solution
sL = st

L =5

Safety stock =
units

= 7.1

zsL = 1.28(7.1) = 9.1 or 9

Reorder point
= dL + safety stock =
2(18) + 9 = 45 units
C=
($15) +
($45) + 9($15)
C = $562.50 + $561.60 + $135 = $1259.10

How Much to Order in a P

System
EXAMPLE
A distribution center has a backorder (BO)
for five 36-inch color TV sets. No inventory is
currently on hand (OH), and now is the time
to review. How many should be reordered if
T = 400 and no receipts are scheduled (SR)?

Solution
IP = OH + SR BO
= 0 + 0 5 = 5 sets
T IP =400 (5) = 405 sets

That is, 405 sets must be ordered to bring the

inventory position up to T sets.

Finding Safety Stock and R

Records

show that the demand for

dishwasher detergent during the lead
time is normally distributed, with an
average of 250 boxes and sL = 22. What
safety stock should be carried for a 99
percent cycle-service level? What is R?

Solution
Safety stock (SS)
= zsL
= 2.33(22) = 51.3
= 51 boxes
2.33 is the number of standard
Reorder point = DL + SS
deviations, z, to the right of
= 250 + 51 average demand during the
= 301 boxeslead time that places 99% of the
area under the curve to the left
of that point.

Reorder Point for Variable

Demand
Let

us return to the bird feeder in Example

12.2. The EOQ is 75 units. Suppose that the
average demand is 18 units per week with
a standard deviation of 5 units. The lead
time is constant at two weeks. Determine
the safety stock and reorder point if
management wants a 90 percent cycleservice level.

Solution

In this case, d = 5, d = 18 units, and L = 2 weeks,

so
dLT = d L = 5 2 = 7.07. Consult the body of the
table in the Normal Distribution appendix for
0.9000, which corresponds to a 90 percent cycleservice level. The closest number is 0.8997, which
corresponds to 1.2 in the row heading and 0.08 in
the column heading. Adding these values gives a
z value of 1.28. With this information, we calculate
the safety stock and reorder point as follows:
Safety stock = zdLT = 1.28(7.07) =9.05 or 9 units
Reorder point
= dL + Safety stock =2(18) + 9 =
45 units

Suppose that the demand during

lead time is normally distributed with
an average of 85 and dLT = 40. Find
the safety stock, and reorder point R,
for a 95 percent cycle-service level

Solution
Safety stock = zdLT = 1.645(40) = 65.8 or 66 units
R = Average demand during lead time + Safety
stock
R = 85 + 66 = 151 units
Find the safety stock, and reorder point R, for
an 85 percent cycle-service level.
Safety stock = zdLT =1.04(40) = 41.6 or 42 units
R = Average demand during lead time + Safety
stock
R = 85 + 42 = 127 units

Reorder point for variable

Demand
For

the ePaint Internet store ,we assume

that the daily demand for Ironcoat paint
is normally distributed with a average
daily demand of 30 gallons and a
standard deviation of 5 gallons of paint
per day.The lead time for receiving a new
order of paint is 10 days.Determine the
reorder point and safety stock if the store
wants a service level of 95%--that is,the
probability of a stockot is 5%.

Solution
d

= 30 gallons per day

L = 10 days
= 5 gallons per day
For the service level,the value of z (from the
ormal table in appendix A) is 1.65.the safety
stock is:
Safety Stock = zd ( L)
= (1.65)(5)(10)
= 26.1 gallons

Cont
The

reorder point is computed as follows:

R = dL + safety stock
= 30(10) + 26.1
= 326.1 gallons

Prepared by: Group no.11